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HQ 546471

September 28, 2001



Jeremy Ross Page, Esq.
Sandler, Travis & Rosenberg LLC
200 West Madison
Suite 2670
Chicago, IL 60606

RE: Transfer price; related parties; research, design and development costs;

Dear Mr. Page:

This is in reply to your letter of August 15, 1996, on behalf of [************************] (hereinafter, the "Company"), concerning the inclusion of certain research and development costs in its transfer price. This matter was also discussed at a meeting at Customs Headquarters on March 5, 1998, following which an additional submission was made under cover of a letter dated May 15, 1998. You have requested that the name of your client and certain other information contained in your submission be treated as confidential. In accordance with part 177, Customs Regulations, you have clearly identified this information and the reasons why it is considered to be confidential. Accordingly, your request for confidentiality is approved and any confidential information contained in this ruling will be deleted from published versions of the decision. We regret the delay in response.


The Company, is a multinational corporation that imports a broad range of consumer products from its subsidiary companies around the world. Its products fall into five categories: fabric and home care, health care, food and beverage, beauty care, and paper. To produce new and/or improved products the Company conducts worldwide basic research and specific development. The research and development work is undertaken overseas and in the U.S. by corporate technical centers established specifically for that purpose, and by various corporate affiliates assigned responsibility for discrete, product-focused development.

Formerly, the value of research and development attributable to imported merchandise was included in the Company’s transfer price; however, the Company’s transfer pricing policy underwent several revisions in 1995, 1996, and, most recently, in the 1997-98 fiscal year. Under the Company’s current transfer pricing policy, all development costs, including certain locally retained costs, are separately invoiced to the Company’s central accounting arm in the United States by the affiliate entity that performed the work. The accounting arm then pays that affiliate entity for the work performed. The transfer price of imported merchandise does not include an amount for research and development work associated with the particular products.

In sales from affiliates to unrelated parties, the Company’s pricing policy calls for the selling affiliate to pay the Company a special “package fee.” It is our understanding that the package fee is transferred to the customer in the price for the merchandise. The package fee is based on a percentage of the resale price of the “net outside sales.” Net outside sales are those sales made by the foreign affiliate to unrelated parties. The package fee is not paid by the affiliate in sales to related parties.

The package fee embraces a number of distinct cost elements, including product development costs, referenced above, that are not included in the Company’s transfer price, or intercompany billing price (“ICBP”). You note that since the package fee is paid solely in connection with net outside sales, it does not pertain to merchandise purchased and imported by the Company or in related party transactions. In addition, you state that although the Company’s ICBP does not include research and development costs, it covers all costs plus a representative profit.

Nonetheless, you conclude that some of the research and development costs for work performed overseas should be added to the Company’s ICBP as they constitute assists. You indicate that the Company is, therefore, prepared to segregate those costs and make appropriate adjustments to the price paid or payable reported to Customs.

You have advised that the Company’s accounting system provides it with the ability to specifically identify and segregate research costs from development costs, and to segregate development costs incurred in the U.S. from development costs incurred elsewhere. Research and development expenditures are classified by the Company as selling, research, and administration costs. These costs are tracked through the Company’s “ASRAP” system, a subsidiary ledger of the Company’s general ledger. Within the general ledger, research, and development costs are classified and controlled via departmental budgets and cost centers. The costs are initially divided into “U.S.” and “International” accounts. These accounts are cleared through the Company’s Global Control Accounts (“GCA”) division. Some U.S. spending is allocated to global categories based on effort, other spending is allocated based on net outside sales. International spending on research and development is also recorded in the Company’s ASRAP system, with allocations to global categories based solely on effort. The reimbursement of research and development expenditure is accomplished through the submission of monthly debit notes generated by the Company’s affiliates for that month’s research and development expenditures. The GCA makes payment against the debit note through the ASRAP system.

The Company’s Comptroller’s Guide uses the following definitions of “research” and “development” for costing purposes. Research is a planned search or critical investigation aimed at discovery of new knowledge with the intent that such knowledge will be useful in developing a new product, package, or process or in bringing about a significant improvement to an existing product, package or process which benefits the Company. Product Development is the translation of research findings and other knowledge into a plan or a design specification for a new product, package or process or for a significant improvement to an existing product, package or process. This includes: formulating, designing and testing product, packaging, process and concept alternatives; demonstrating the efficacy and human/environmental safety of products, processes and ingredients up through obtaining government approval on this basis to market products; testing to generate new scientific knowledge in support of new product/package initiatives; qualifying products, packages and processes for commercialization; and constructing prototypes and operating pilot plants, test stands and development lines up to the point at which a fully practical model product is defined and meets project success criteria.

Based on these definitions, the Company identifies individual expenditures and segregates them into three categories. Category I involves Corporate line services including expenditures specifically related to a product sector or brand. Category II is expenditures for central divisional services including some sector or brand identity and overall corporate needs or goals. Category III includes expenditures for general corporate expenses. Category III expenditures serve only the overall corporate needs or goals. The Company treats research expenditures as Category III expenses, and development expenditures are treated as Category I and II expenses. Thus, the Company is capable of segregating its costs by category as well as by whether it is incurred in the U.S. or elsewhere.

It is your position that “the exclusion of R&D expenditures from the Company’s transfer price constitutes a dutiable assist under Customs Valuation Statute, and that such dutiability is limited solely to that amount of development incurred outside of the United States.”


Is the price between the related parties acceptable for purposes of transaction value where certain costs for research and development are excluded from the transfer price?


Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1979, as amended by the Trade Agreements Act of 1979 (19 U.S.C. § 1401a; TAA). The primary basis of appraisement is transaction value, defined as "the price actually paid or payable for the merchandise when sold for exportation to the United States," plus amounts for certain enumerated additions thereto. 19 U.S.C. § 1401a(b)(1). The enumerated additions include the value, apportioned as appropriate, of any assists. 19 U.S.C. § 1401a(b)(1). Assists are specifically defined in section 402(h)(1)(A) of the TAA as:
any of the following if supplied directly or indirectly, and free of charge or at a reduced cost, by the buyer of imported merchandise for use in connection with the production or of the sale for export to the United States of the merchandise:

Materials, components, parts, and similar items incorporated in the imported merchandise; Tools, dies, molds, and similar items used in the production of the imported merchandise; Merchandise consumed in the production of the merchandise; Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and necessary for the production of the imported merchandise.

It is your position that a portion of the research and development costs are properly considered assists in the case of sales to related parties where the package fee is not charged. On the other hand, you conclude that those costs that are incurred in the United States are not assists, and should not be added to the intercompany billing price.

We do not agree with your characterization of the issue. When examining a related party transaction for purposes of transaction value, the first inquiry is whether the relationship has influenced the price. The question here is whether the transfer price, exclusive of certain costs for research and development, is acceptable for transaction value purposes. Pursuant to section 402(b)(2)(A)(iv), the transaction value of imported merchandise shall be acceptable only if the buyer and the seller are not related, or if the buyer and the seller are related, the transaction value is acceptable under section 402(b)(2)(B). That section provides that transaction value between a related buyer and seller is acceptable if the buyer demonstrates that the declared transaction value meets one of two tests: circumstances of the sale and test values. No evidence was submitted in support of the latter test, Test Values, therefore, our analysis of the parties’ intercompany billing price is limited to whether the circumstances of the sale indicate that the price was not influenced by the relationship.

If the circumstances of the sale indicate that although the parties are related, they buy and sell from one another as if they were unrelated, transaction value will be considered to be acceptable. The factors considered in the analyzing the circumstances of a sale are set forth in the Statement of Administrative Action (SAA), reprinted in Customs Valuation under the Trade Agreements Act of 1979; Department of Treasury, U.S. Customs Service (October 1981) at 54; and section 152.103(j)(2) of the Customs Regulations, title 19 (19 CFR 152.103(j)(2)). The SAA provides that in weighing a related party sale, Customs will examine the manner in which the buyer and seller organize their commercial relations and the way in which the prices in question were derived. If the importer can show that the price was settled in a manner consistent with the normal pricing practices of the industry in question, or with the way in which the seller deals with unrelated parties, Customs will find that the price has not been influenced by the relationship. Or, if the importer can show that the price is adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit realized over a representative period of time in sales of merchandise of the same class or kind, this would demonstrate that the price has not been influenced. See HRL546449 dated Jan. 6, 1998 and 19 CFR 152.103(l)(1)(iii).

It is our position that the research and development costs are not assists that should be added to the price, but rather, that all costs should be included in the value to meet the circumstances of the sale test. The circumstances of the sale test makes no distinction as to which costs should be included or excluded. Rather, the regulatory language indicates that all costs incurred by the seller for the merchandise should be included in the value. See interpretive note (3) of 19 CFR 152.103(l)(1)(iii). In this case, by your own admission, research and development costs have been excluded from the value. We therefore, conclude that the relationship influences the price. Further, since the expenditures for research and development are factored in the affiliate’s price to unrelated parties, we conclude that the seller does not deal with its related buyer in the same way that it deals with its unrelated buyers. Based on the facts before us, transaction value would not be applicable.

However, if the value included an amount for the expenses attributed to the affiliate, we believe that the transaction value would be viable. The Company has demonstrated to our satisfaction that it is capable of segregating the expenses attributed to each affiliate in each category. Accordingly, for transaction value to be acceptable, those expenses attributed to the selling affiliate must be included in the value.

If the Company is unable to make an appropriate adjustment for the research and development, then appraisement would be based on one of the appropriate succeeding methods. We have insufficient information upon which to determine the proper basis of appraisement under any of the succeeding methods, and therefore decline comment on such.


The price between the parties represents an acceptable transaction value only where it includes all of the costs attributed to the selling affiliate. Where the price between related parties excludes those costs and an appropriate adjustment is not made to the declared value, we conclude that the relationship between the parties influences the price such that the use of transaction value is unacceptable.


Virginia L. Brown
Chief, Value Branch

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