HQ 544337
April 9, 1990
VAL CO:R:C:V 544337 VLB
CATEGORY: Valuation
------
Parts/Customs Manager
------
------
------
RE: Dutiability of Research and Development Costs
Dear Mr. ------:
This is in response to your letter dated May 8, 1989,
concerning the dutiability of research and development costs
(R&D) incurred by your company. We regret the delay in
responding.
FACTS:
The imported merchandise is firearms. You explain that when
the merchandise is entered, the company "pays additional duty
based on the allocated R&D costs."
You have attached a copy of the "------World Wide R&D
Cost Sharing Agreement" (the "Agreement") which was executed on
January 1, 1988, between ------, Inc. and ------, S.A., a
Belgian corporation. The Preamble of the Agreement states the
following:
[E]ffective as of January 1, 1988, the ------group
(of which both parties are members) was completely spun
off from FABRIQUE NATIONALE HERSTAL S.A. to become a
worldwide operationally autonomous group (except that
such group remains financially controlled by FABRIQUE
NATIONALE which owns the majority of the common stock
of ------S.A., the parent company of the ------
group);
[C]oincident and consistent with such reorganization,
was creation, by ------INC. and ------S.A., of a
BROWNING worldwide R&D organization for new models of
firearms and improvements of existing models of
firearms. . .
- 2 -
Article 1, section 1.1 of the Agreement states that the
research and development costs "include any cost for studies,
tests, prototypes, and detailed and finalized drawings which will
allow the manufacturer to industrialize the new model, or
improvement."
Article 2 of the Agreement explains that each party to the
Agreement will be responsible for paying a percentage of the R&D
Firearms Common yearly Budget equal to the percentage that that
party's yearly budget of net sales worldwide bears to the total
budget of net sales worldwide of both parties.
Finally, Article 3 of the Agreement grants ------, Inc.
the exclusive right to sell in the U.S. products incorporating
any original ideas, models, concepts inventions, designs, know
how and other intangible assets that were developed by either
party within the framework of activities subject to the
Agreement.
ISSUE:
Whether the R&D costs are includable in the appraised value
of the merchandise.
LAW AND ANALYSIS:
Transaction value, the preferred method of appraisement is
defined in section 402(b)(1) of the Tariff Act of 1930, as
amended by the Trade Agreements Act of 1979 (19 U.S.C.
1401a(b);TAA) as the "price actually paid or payable for the
merchandise" plus five enumerated statutory additions.
You do not state whether your company purchases from
sellers that are related as defined in section 402(g) of the TAA.
However, the Agreement does indicate that there may be sales
between the parties to the Agreement as well as sales to
subsidiaries of one of the parties. Therefore, it appears that
there may be related party sales.
Section 402(b)(2)(B) of the TAA states the following:
The transaction value between a related buyer and
seller is acceptable . . . if an examination of the
circumstances of the sale of the imported merchandise
indicates that the relationship between such buyer and
seller did not influence the price actually paid or
payable; or if the transaction value of the imported
merchandise closely approximates [one of the enumerated
test values].
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Your letter does not contain sufficient information for us
to determine whether the relationship affects the price of the
imported merchandise. However, for purposes of this ruling, we
are assuming that transaction value is the applicable
appraisement method for related party transactions as well as any
unrelated party sales.
One of the statutory additions to the price actually paid or
payable is "the value apportioned as appropriate, of any assist .
. . ." The term "assist" is defined in section 402(h) of the TAA
as follows:
any of the following if supplied directly or
indirectly, and free of charge or at reduced cost, by
the buyer of imported merchandise for use in connection
with the production or the sale for export to the
United States of the merchandise:
(i) Materials, components, parts, and similar
items incorporated in the imported
merchandise.
(ii) Tools, dies, molds, and similar items
used in the production of the imported
merchandise.
(iii) Merchandise consumed in the production
of the imported merchandise.
(iv) Engineering, development, artwork,
design work, and plans and sketches that are
undertaken elsewhere than in the United
States and are necessary for the production
of the imported merchandise.
The information presented establishes that the activities
covered by the Agreement fall within section 402(h)(1)(iv). In
addition, it appears from the Agreement that these activities are
not undertaken in the U.S. Therefore, the costs of these
activities must be added to the price actually paid or payable
for the merchandise.
If the development, plans, sketches, etc., are used in the
production of merchandise that is only partially for export to
the U.S., or if the assists are used in several countries, then
the costs of these assists may be apportioned to the imported
merchandise in accordance with generally accepted accounting
principles. See, 19 CFR 152.103(e).
- 4 -
HOLDING:
The activities covered by the Agreement are assists under
section 402(h)(1)(iv) of the TAA. Therefore, the cost of the
activities must be added to the price actually paid or payable
for the imported merchandise.
Sincerely,
John Durant, Director,
Commercial Rulings Division