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HQ 547487

June 23, 2000

RR:IT:VA 547487NL


Port Director
U.S. Customs Service
4341 International Pkwy.
Suite 600
Atlanta, GA 30354

RE: Request for Internal Advice – Cost of Design/Development Work (your file No. APP 6-01 A:P:JP)

Dear Sir:

This is in reply to your request for Internal Advice dated August 20, 1999, concerning the dutiability of costs incurred outside the U.S. by the parent of the importer, adidas America, Inc., for design and development activities.


The importer, adidas America, Inc., is engaged in, among other things, importing footwear for sports such as tennis, soccer, football, track and field, walking, training, fitness, basketball and others. Both adidas America and its foreign parent participate in the design and development of various styles and models, with the work being divided between the two according market emphasis. For example, adidas America conducts design and development in the U.S. for basketball shoes, while the parent designs and develops soccer shoes overseas. In both cases, designs are submitted to foreign manufacturers for production under the adidas name.

Pursuant to section 402(h)(1)(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(h)(1); TAA), no service or work performed by an individual domiciled within the United States is treated as an assist. Thus, design work carried out by adidas America in the U.S. is not treated as an assist. The only matter for inquiry here is extent to which the cost of design work performed by adidas America’s foreign parent is added as an assist to the price actually paid or payable by adidas America to foreign manufacturers of shoes which it imports.

By a letter to you dated September 16, 1997, counsel for the importer advised that while in the past adidas America had assumed that the foreign parent’s design and development activities represented assists, a recent internal review had concluded otherwise. Counsel advanced the position, based upon Headquarters rulings, that the design and development activities were not “necessary for the production of the merchandise” within the meaning of section 402(h)(i)(a) of the Tariff Act, and therefore should not be treated as assists for purposes of appraisement. Instead, it was argued, the shoe designs and patterns prepared by the foreign parent for the foreign manufacturers were specifications reflecting what to produce, and were not themselves “necessary to the production of the merchandise.”

As illustration of the design and development work submitted by the foreign parent to foreign manufacturers, adidas America submitted a representative “Tech Package”. The Tech Package consists of patterns, (alleged typically not to be used by manufacturers); detailed technical drawings; drawings showing colors of parts; part maps; specifications for particular parts; and itemized parts lists specifying materials, suppliers, quality codes and colors.

By a letter to this office dated February 11, 2000, counsel indicated the parent company was in a position to account separately for the costs of: 1) its design function, referring to identifying market trends and conceptualizing product line additions and changes; and 2) its development function, referring to the conversion of concepts to specifications.


Are the costs of the foreign parent’s design and development activities to be treated as assists?


For purposes of appraisement certain items are treated as assists, the costs of which, when provided by the buyer at free or at reduced cost, directly or indirectly, are to be added to the price actually paid or payable for merchandise. Section 402(h)(1)(A). The enumerated assists include materials incorporated in imported merchandise, tools and dies used in its production and merchandise consumed in the production. Also treated as assists are “engineering, development, artwork, design work, and plans or sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.” Section 402(h)(1)(A)(iv).

The terms “engineering”, “development” “artwork” “design work” and “plans or sketches” accurately describe the contents of the “Tech Package” which is undertaken and delivered, we assume at no cost, by the foreign parent of adidas America to foreign manufacturers of shoes. We take it as conceded that when such work is delivered by adidas America’s parent, it is properly considered to have been supplied indirectly by adidas America. To this extent, the contents of the Tech Package constitute assists.

The only remaining question is whether, as prescribed in section 402(h)(1)(A)(iv), the technical and design materials contained in the Tech Package are “necessary for the production of the imported merchandise.

On this point, notwithstanding that the manufacturer may undertake further technical drawings elaborating the specifications, it is clear that the elements of the Tech Package are necessary for the production of the shoes. The enumeration of specifications, parts, placement of parts and color of parts conveys precisely the manner in which the buyer wishes the shoes to be constructed.

The importer has referred to the holding in C.S.D. 82-149. In that ruling it was concluded that certain drawings were not necessary to the production of the merchandise, and therefore not dutiable as assists, because: 1) they reflected styles readily available in the public domain or to the industry; and 2) the manufacturers could have produced the goods without relying upon the drawings. We do not find that either situation is present here. Certain of the drawings bear indications reserving copyright and other ownership interests, and clearly are not publicly or widely available. Secondly, the degree of detail in the specifications is clearly aimed at the organization of manufacture in a specified manner. For these reasons we do not consider the holding in C.S.D. 82-149 to be applicable.

As noted above, the importer has reported that its parent is in a position to distinguish in its accounts between costs of the kinds of design materials contained in the Tech Package, which are dutiable as assists, and other “design” activities concerning market identification and product conceptualization. It would be a separate question whether the latter activities constitute assists. Given that they were not described or substantiated in the documents submitted in this file, we are not in a position to provide an answer.

Concerning the dutiable design and development assists exemplified in the Tech Package, the importer has suggested a cost allocation approach. For those categories of shoes designed abroad, the value of the assist would be based on the volume of such shoes shipped to the U.S. market relative to worldwide shipments. Subject to your review of a more specific presentation, we believe that the suggested approach seems reasonable.


The design and development activities of the foreign parent of adidas America, Inc., as set out in the Tech Package of specifications, technical drawings and design instructions, constitute assists within the meaning of section 402(a)(h)(1)(A)(iv). To the extent that transaction value is used, the value of the assist, apportioned as appropriate, is to be added to the price paid or payable for the merchandise. If transaction value is not the basis of appraisement the apportioned value or cost of the assist is to be applied as appropriate under section 402.

Please provide a copy of this ruling letter to counsel for adidas America.


Thomas L. Lobred
Chief, Value Branch

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