HQ 545913: Inclusion of rejected, scrapped, and lost materials as assists; Revocation of HRL 543623; HRL 545135; 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 545913

                       November 30, 1995

VAL RR:IT:VA 545913 LPF

CATEGORY: Valuation

Mr. Arthur Litman
President
Castelazo & Associates
5420 West 104th Street
Los Angeles, CA 90045

RE:  Inclusion of rejected, scrapped, and lost materials as assists;  Revocation of HRL 543623; HRL 545135; Section 402(h)(1)(A) of the     TAA; 19 CFR 152.103(d)(1) and (e)(1)

Dear Mr. Litman:

     This decision concerns Headquarters Ruling Letter (HRL) 543623,
issued November 4, 1985, wherein it was determined, in pertinent part,
that the value of materials rejected, scrapped, 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 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
revocation of HRL 543623 was published on May 17, 1995, in the Customs
Bulletin, Volume 29, Number 20.

FACTS:

     An importer furnishes plastic, in resin form, to a foreign
manufacturer free of charge.  The resin is used in a plastic injection
molding machine to produce plastic products which will be imported into
the U.S.  Some of the plastic resin is rejected, scrapped, or lost
during the production process.  We assume that the "loss" in this case
refers to a decrease in the amount or magnitude of resin which occurs
from, and during, the production of the plastic products. 

ISSUE:

     Whether materials which are rejected, scrapped, or lost during the
manufacture of imported merchandise 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 valu   e may be app   ortioned 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 materials, such as plastic resin) 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 plastic products in
accordance with section 402(h)(1)(A)(iii) of the TAA and, hence, to
constitute an assist if such material:

          a. during the manufacture of the imported merchandise;

          b. either decreases in amount or magnitude (or otherwise 
          is depleted), or is found to be defective or not up to           quality; and

          c. subsequently is discarded, scrapped or otherwise              destroyed.

See HRL 545135, issued August 27, 1993, where a cell culture consumed in
the production of a tissue-culture solution was found to constitute an
assist.  Based on the facts presented, the plastic resin was consumed in
the production of the imported plastic products in accordance with the
foregoing.

     Valuation of the assist (including the material consumed in the
production of the plastic products) and apportionment of that value to
the imported merchandise 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 material at issue which is rejected, scrapped, or lost during
the manufacture of the imported plastic products, constitutes an assist
since it is consumed in the production of the imported merchandise
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 543623 hereby is revoked.  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