HQ 545909: Inclusion of scrap or waste as assists; Modification of HRL 544662; Section 402(h)(1)(A) of the TAA; 19 CFR 152.103(d)(1) and (e)(1)

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 545909

                       November 30, 1995

VAL RR:IT:VA 545909 LPF

CATEGORY: Valuation

Port Director
New York Seaport
U.S. Customs Service
6 World Trade Center
New York, NY 10048

RE:  Inclusion of scrap or waste as assists; Modification of HRL           544662; Section 402(h)(1)(A) of the TAA; 19 CFR 152.103(d)(1) and
     (e)(1)

Dear Director:

     This decision concerns Headquarters Ruling Letter (HRL) 544662,
issued March 18, 1994, as internal advice request 62/91 filed by
Sharrets, Paley, Carter & Blauvelt, P.C. on behalf of Baby Togs, Inc. 
In pertinent part, it was determined in HRL 544662 that the value of
materials destroyed or lost and not otherwise physically incorporated
into the imported merchandise was not to be included in the transaction
value of the merchandise.  We have reviewed this portion of the decision
and the proper appraisement is as follows.  Pursuant to section 625,
Tariff Act of 1930 (19 U.S.C. 1625), as amended by section 623 of Title
VI (Customs Modernization) of the North American Free Trade Agreement
Implementation Act, Pub. L. 103-182, 107 Stat. 2057, 2186 (1993)
(hereinafter section 625), notice of the proposed modification of HRL
544662 was published on May 17, 1995, in the Customs Bulletin, Volume
29, Number 20.

FACTS:

     Baby Togs imports children's wearing apparel from its wholly-owned
Philippine subsidiary, Novelty Philippines, Inc. ("NPI").  Baby Togs
supplies NPI with fabric, trim and accessories on a consignment basis,
which NPI uses to manufacture wearing apparel.  One area in which the
Regulatory Audit Division determined that Baby Togs undervalued its
costs was "material assists."  However, counsel, in pertinent part,
asserted that in accordance with HRL 543093, issued April 30, 1984,
materials that are destroyed, scrapped, or lost, and which are not
physically incorporated into the imported merchandise are not assists
pursuant to section 402(b) of the Tariff Act of 1930, as amended by the
Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a. 
Customs agreed and, on this basis, it was determined that the value of
such materials was not included in the transaction value of the
merchandise and, consequently, that the importer did not undervalue its
costs for material assists. 

ISSUE:

     Whether materials which are destroyed, scrapped or lost may
constitute assists and, if so, in what manner they are to be valued and
apportioned to the imported merchandise.

LAW AND ANALYSIS:

     The preferred method of appraising merchandise imported into the
United States is transaction value pursuant to section 402(b) of the
Tariff Act of 1930, as amended by the Trade Agreements Act of 1979
(TAA), codified at 19 U.S.C. 1401a.  Section 402(b)(1) of the TAA
provides, in pertinent part, that the transaction value of imported
merchandise is the "price actually paid or payable for the merchandise
when sold for exportation to the United States" plus enumerated
statutory additions, including the value, apportioned as appropriate, of
any assist.  19 U.S.C. 1401a(b)(1). 

     The "price actually paid or payable" is defined in section
402(b)(4)(A) of the TAA as the "total payment (whether direct or
indirect, and exclusive of any costs, charges, or expenses incurred for
transportation, insurance, and related services incident to the
international shipment of the merchandise...) made, or to be made, for
the imported merchandise by the buyer to, or for the benefit of, the
seller."

     Section 402(h)(1)(A) of the TAA provides, in pertinent part, as
follows:

     The term 'assist' means 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.

     Furthermore, the TAA Statement of Administrative Action (SAA) and
section 152.103(d)(1), Customs Regulations (19 CFR 152.103(d)(1)), set
forth the manner in which assists are to be valued.  In particular,
section 152.103(d)(1) states that:

          If the assist consists of materials, components,
          parts, or similar items incorporated in the
          imported merchandise, or items consumed in the
          production of the imported merchandise, acquired
          by the buyer from an unrelated seller, the value
          of the assist is the cost of its acquisition.  If
          the assist were produced by the buyer or a person
          related to the buyer, its value would be the cost
          of its production.  In either case, the value of
          the assist would include transportation costs to 
          the place of production.

     Finally, the SAA and section 152.103(e)(1), Customs Regulations
(19 CFR 152.103(e)(1)), provide the manner in which the value of an
assist is to be apportioned to the imported merchandise:

          The apportionment of the value of assists to imported            merchandise will be made in a reasonable manner                  appropriate to the circumstances and in accordance 
                     with generally accepted accounting principles.  The              method of apportionment actually accepted by Customs             will depend upon the documentation submitted by the              importer.  If the entire anticipated production using the assist is for exportation to the United States, 
                        the total    value may be    apportioned over (i) the first               shipment,   if the importer wishes to pay duty on    the              entire value at once, (ii) the numb   er of units produced          up to the time of the    first shipment, or (iii) the entire anticipated production.  In addition to these three methods, the importer may request some other method of apportionment in accordance with generally accepted accounting principles.  If the anticipated production is only partially for exportation to the United States, or if the assist is used in several countries, the method of appraisement will depend upon the documentation submitted by the importer.

     Based on the statutory and regulatory language cited above, it
remains Customs position that in regard to material or components which
may constitute assists, a three part analysis must be employed.  First,
the material or components must fit the definition of an assist; 
second, it must appropriately be valued as an assist; and third, the
value of the assist must be apportioned to the imported merchandise.

     Upon review, it is our position that in situations where scrap or
waste results from, or during, the production process, limiting the
analysis only to consider whether the material or components were
physically incorporated into the completed imported merchandise is 
inconsistent with the language provided in the TAA.  Rather, we stress
that the TAA provides that material or components "use[d] in connection
with the production or the sale for export to the United States of the
merchandise" constitutes an assist not only when "incorporated in the
imported merchandise," but also when "consumed in the production of the
imported merchandise (emphasis added)."  The fact that waste or scrap
(of a material such as a bolt of fabric) which results from, or during,
the production of the imported merchandise is not physically
incorporated in that merchandise does not negate the fact that such
material or components still may be consumed in the production of the
merchandise and constitute assists.

     The definition of an assist is not inextricably tied to the value
or apportionment of an assist.  Once it is determined that material or
components meet the definition of an assist, the inquiry then concerns
the cost of acquisition or production of that assist.  Apportionment of
the value of the assist subsequently comes into consideration.

     Accordingly, once it is determined that material or components
meet the definition of an assist in accordance with the above, then
Customs will consider, among other things, the accounting records of the
supplier of the assists to determine the value of the assist.  Customs
would consider such information in cases including those where scrap or
waste results from, or during, the production of the imported
merchandise.

     In the instant situation, Customs now considers material to have
been consumed in the production of the imported apparel in accordance
with section 402(h)(1)(A)(iii) of the TAA and, hence, to constitute
assists if such material:

          a. during the manufacture of the imported merchandise;

          b. either falls to the factory floor (or otherwise is            accumulated when the fabric is cut or worked), or is 
          found to be defective or not up to quality; and

          c. subsequently is discarded, scrapped or otherwise              destroyed.  

On the other hand, material would not be deemed incorporated in, nor
consumed in the production of, the imported apparel and, therefore,
would not constitute an assist if such material is lost and does not
enter the manufacturing process of the imported merchandise.

     Valuation of the assist (including the material consumed in the
production of the apparel) and apportionment of that value to the
imported apparel subsequently are considered.  See 19 CFR 152.103(d)(1)
and (e)(1).  These latter determinations are to be based on objective
and quantifiable data including, among other things, the accounting
records of the supplier of the assists made in conformity with generally
accepted accounting principles.

HOLDING:

     The destroyed, scrapped or lost material at issue constitutes an
assist when, in accordance with the foregoing, it is consumed in the
production of the imported apparel pursuant to section 402(h)(1)(A)(iii)
of the TAA.  Valuation of the assist and apportionment of that value to
the imported merchandise is to be based on objective and quantifiable
data, including, among other things, the accounting records of the 

supplier of the assists made in conformity with generally accepted
accounting principles.

     HRL 544662 is modified accordingly.  In accordance with section
625, this ruling will become effective 60 days from its publication in
the Customs Bulletin.  Interested parties who import merchandise
consistent with the facts set forth in this decision are encouraged to
contact the appropriate Customs field personnel to discuss the
processing of their specific entries and may submit requests for new
binding valuation rulings to the Value Branch, Office of Regulations and
Rulings.

     
                                   Sincerely,



                                   Acting Director,
                                   International Trade Compliance                                     Division