HQ 545110: Payments by importer for samples used for soliciting orders;equipment used in the manufacture of samples; price actually paidor payable.

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 545110

                          March 11, 1994



VAL CO:R:C:V 545110 CRS

CATEGORY:  Valuation

Alan G. Lebowitz, Esq.
Scott A. Cohn, Esq.
Grunfeld, Desiderio, Lebowitz & Silverman
12 East 49th Street
New York, NY 10017

RE:  Payments by importer for samples used for soliciting orders;
equipment used in the manufacture of samples; price actually paid
or payable.

Dear Messrs. Lebowitz and Cohn:

     This is in reply to your letter dated September 21, 1992, on
behalf of Mamiye Brothers (the buyer), concerning the dutiability
of certain payments made by your client for the procurement of
samples.  We regret the delay in responding.

FACTS:

     The buyer, an importer of children's wearing apparel, procures
garment samples from Sterling Products, Inc. (the seller), a
related company in Hong Kong.  The sample garments will be used to
design wearing apparel and solicit sales orders and will be
produced on the buyer's instructions.

     The buyer will reimburse the seller for costs incurred in the
design, development and production of the samples to include the
following:  the cost of fabric used to produce samples; the
acquisition and development cost of rollers used in printing the
fabric; the total cost of trim used in the production of the
samples; the cost of labor involved in cutting, sewing, printing,
embroidery, ornamentation; etc.; a percentage of the seller's
overhead attributable to the cost of producing the samples; and a
ten percent profit margin on the total of the costs identified
above.  The seller will send the buyer a debit note on a monthly or
other periodic basis for the costs incurred in the design and
production of the samples.  In a conversation with a member of my
staff you stated that payments of amounts due under the debit notes
likely will be made after the samples are imported.

     The rollers are dedicated to a particular type of fabric
pattern.  Should a sample produced by the seller be selected for
full-scale production, you state that the buyer will not be charged
for the cost of the roller or rollers used to print the fabric
pattern of that particular garment.  Instead, the cost of the
rollers will be amortized, i.e., included, in the price of garments
shipped pursuant to a purchase order for a full production run.

     Most of the samples manufactured by the seller will be shipped
to the United States; however, at least one sample of each style
produced will be retained by the seller.  The samples will be
imported in a mutilated condition and the accompanying invoices
will state that the samples have no commercial value.

     In addition, you state that on occasion the buyer will provide
the seller with U.S. design work, as well as fabric swatches or
garment parts obtained from foreign store-bought garments, the
purpose of which is to illustrate the U.S. design work.  You do not
consider the swatches and parts to be assists since in your view
these items are not design work nor are they necessary for
production.

ISSUES:

     The issues presented are:  (1) how should the imported garment
samples for which the buyer makes periodic payments pursuant to
debit notes issued by the seller be appraised? and (2) how should
the subsequently imported production merchandise be appraised?

LAW AND ANALYSIS:

     Merchandise imported into the United States is appraised in
accordance with section 402 of the Tariff Act of 1930, as amended
by the Trade Agreements Act of 1979 (TAA; 19 U.S.C.  1401a).  The
preferred method of appraisement is transaction value, which is
defined as the "price actually paid or payable for the merchandise
when sold for exportation to the United States," plus five
enumerated additions.  19 U.S.C.  1401a(b)(1).  The term "price
actually paid or payable" is defined as "the total payment (whether
direct or indirect...) made, or to be made, for imported
merchandise by the buyer to, or for the benefit of, the seller." 
19 U.S.C.  1401a(b)(4)(A).  For the purposes of this ruling we
have assumed that transaction value is the appropriate basis of
appraisement.

     However, we note that buyer and the seller are related
parties.  While we do not address this issue for the purposes of
this ruling, should it be determined that the relationship between
the parties affects the price actually paid or payable, transaction
value may not be an acceptable basis of appraisement.  In addition,
this ruling does not reach the issue of whether the swatches and
garment parts provided by the buyer to the seller constitute
assists.

     The seller will produce sample garments for the buyer and on
a periodic basis issue debit notes for the design, development and
production costs associated with the samples.  Included in the
total cost of the samples are the cost of fabric, the acquisition
and development costs of rollers used to print the fabric, the cost
of trim, labor, overhead and profit.  Accordingly, you have asked
how the imported samples should be appraised and whether the
periodic payments for the costs associated with the production of
the sample garments are part of the price actually paid or payable
of the subsequently imported production merchandise.

     You contend that the periodic payments for the mutilated
samples are not separately dutiable, i.e., as part of the price
actually paid or payable for the subsequently imported production
merchandise.  You note that when the samples are imported it is not
known which styles will eventually be selected for production;
indeed, most samples are not selected for full scale production. 
In the event that a sample is selected for full-scale production,
however, the seller will not charge the buyer for the cost of the
roller used to print the fabric.  Instead, the cost of the roller
will be amortized in the price of the subsequently imported
merchandise.

     The price actually paid or payable for imported merchandise
includes all payments, whether direct or indirect, made by the
buyer to, or for the benefit of, the seller.  19 U.S.C. 
1401a(b)(4)(A).  The buyer will make periodic disbursements to the
seller as payment for the sample garments.  Consequently, the
periodic payments covering design, development and production costs
are part of the price actually paid or payable for the imported
samples, again assuming that the relationship between the parties
has not influenced the price.

     However, you have advised that if a sample is chosen for full-scale production the seller will amortize the cost of the rollers
used to print the fabric in the price of the subsequently imported
production merchandise.  In HRL 544516 dated January 9, 1991, we
held that the cost of producing prototypes that were a necessary
step in the design and development of subsequently imported
merchandise was part of the price actually paid or payable for that
merchandise.  See also HRL 544642 dated June 24, 1991.  In the
instant case, some rollers will be used to make production garments
as well as samples; consequently, these rollers form a necessary
step in the design and development of the subsequently imported
production garments and must be reflected in the transaction value
of that merchandise.

     Although the seller will amortize the cost of rollers used to
make production run garments in the price of the subsequently
imported merchandise, the cost of the rollers represents only part
of the design and development costs related to the subsequently
imported production merchandise.  It is Customs' position that all
costs related directly to the development of samples or prototypes
should be included in the transaction value of the subsequently
imported production merchandise.  For example, in HRL 544516 and
HRL 544642, the buyer paid the seller to design a prototype
vehicle.  The design and development costs of the prototype vehicle
included, inter alia, service/installation manuals, user manuals
and parts lists.  These costs were considered to be directly
related to the subsequently imported merchandise.  Accordingly,
they were included in the price actually paid or payable for the
imported production vehicles.  Thus in the instant case, in
addition to the cost of the rollers, all other costs associated
with samples that are selected for full production, e.g., the cost
of materials, trim, etc., should be amortized in the price of the
production garments, or otherwise reflected in the transaction
value of the subsequently imported merchandise.

     Finally, while no evidence has been submitted in regard to the
amortization of sample costs in the price actually paid or payable,
we assume that, if required, documentation to substantiate this
fact will be made available to Customs.

HOLDING:

     The periodic payments for the imported sample garments
constitutes the price actually paid or payable for that
merchandise.

     The transaction value of the subsequently imported merchandise
should reflect all design and development costs associated with
samples that result in production garments.

                         Sincerely,





                         John Durant, Director
                         Commercial Rulings Division