HQ 545199: Inclusion of capital improvement costs in the computed value of assembled merchandise

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                            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