HQ 545911: Inclusion of rejected, lost, and destroyed components as assists; Modification of HRL 543831; 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 545911

                       November 30, 1995

VAL RR:IT:VA 545911 LPF

CATEGORY: Valuation

Port Director
U.S. Customs Service
555 Battery St.
San Francisco, CA 94111

RE:  Inclusion of rejected, lost, and destroyed components as assists;     Modification of HRL 543831; 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) 543831,
issued January 25, 1988, to the former district director, as an
application for further review concerning protest number 2809-4-001046. 
In pertinent part, it was determined in HRL 543831 that the value of
rejected, lost, or destroyed components which were 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 follows.

     First, we note that HRL 543831 is a decision on a specific
protest.  A protest is designed to pertain to entries of merchandise
which have been liquidated by Customs.  A final determination of a
protest, pursuant to part 174, Customs Regulations (19 CFR 174), cannot
be modified or revoked, because it applies only to the merchandise which
was the subject of the protested entry.  Furthermore, Customs lost
jurisdiction over the protested entries in HRL 543831 once the protest
was granted in part and denied in part.  See San Francisco Newspaper
Printing Co. v. United States, 9 CIT 517, 620 F. Supp. 738 (1985).

     However, Customs may modify or revoke a protest review decision to
change the legal principles set forth in that decision.  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), sixty days after the date of issuance,
Customs may propose a modification or revocation of a prior
interpretative ruling or decision by publication and solicitation of
comments in the Customs Bulletin.  Pursuant to section 625, notice of
the proposed modification of HRL 543831 was published on May 17, 1995,
in the Customs Bulletin, Volume 29, Number 20.

FACTS:

     Inmos Corporation imports integrated circuit devices from the
Philippines.  The importer furnishes, free of charge, integrated circuit
components to the Philippine assembler.  It is our understanding that a
portion of the circuit components are rejected, lost, or destroyed.

ISSUE:

     Whether components which are rejected, lost, or destroyed 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 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 discrete components, such as circuits, CPU chips, or semi-conductors) 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 discrete
components to have been consumed in the production of the imported
circuit devices in accordance with section 402(h)(1)(A)(iii) of the TAA
and, hence, to constitute assists if such components:

          a. during the manufacture of the imported merchandise;

          b. are found to be defective or not up to quality; and

          c. subsequently are discarded, scrapped or otherwise             destroyed.

On the other hand, components would not be deemed incorporated in, nor
consumed in the production of, the imported merchandise and, therefore,
would not constitute assists if such components either are found to be
defective or not up to quality, or are lost, and do not enter the
manufacturing process of the imported merchandise.

     Valuation of the assists (including the components consumed in the
production of the circuit devices) 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 rejected, lost, or destroyed components at issue constitute
assists when, in accordance with the foregoing, they are consumed in the
production of the imported circuit devices pursuant to section
402(h)(1)(A)(iii) of the TAA.  Valuation of the assists 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 543831 is modified accordingly.  This ruling will not affect
the entries which were the subject of protest number 2809-4-001046 but,
in accordance with section 625, it will be applicable to any
unliquidated entries or future importations of similar merchandise 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