HQ 544480: Request for Internal Advice; Dutiability of Certain Depreciation Costs

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 544480

                       September 21, 1990

VAL-2 CO:R:C:V 544480 pmh

CATEGORY: Valuation

Regional Director, Regulatory Audit Division
Chicago, IL

RE: Request for Internal Advice; Dutiability of Certain
    Depreciation Costs

Dear Sir:

     This is in response to your memorandum dated March 13, 1990
(MAN-1-CO:RA:C), regarding a request for internal advice on the
dutiability of depreciation costs associated with certain
equipment.  This equipment is provided free of charge by the
importer to the foreign manufacturer.

     According to the March 7, 1990 request for internal advice
submitted by the importer, Outboard Marine Corporation (OMC), to
the Southeast Region, OMC imports merchandise from its Mexican
subsidiary (OMEX).  The imported merchandise consists of small
outboard motors and other small electrical and fuel assemblies to
be used in boats.  OMC supplies certain equipment to OMEX free of
charge and this equipment remains on OMC's depreciation schedule.
The merchandise imported by OMC is subject to special duty status
under subheading 9802.00.80 of the Harmonized Tariff Schedule of
the United States.  A regulatory audit was performed to verify
the value of the U.S. origin components deducted from the value
of the imported merchandise.  During this audit it was discovered
that an amount reflecting the depreciation costs of the equipment
OMC supplies to OMEX was not reflected in the total amount of
U.S. assist costs.  It is the opinion of the concerned auditors
that the equipment constitutes assists and should be factored
into the appraised value of the imported merchandise.

     The importer has enclosed a list of the equipment it has
supplied to OMEX.  OMC has divided these items into six
categories.  These categories are: General Plant and Office
Equipment (GPO), Maintenance Tools and Equipment (Main),
Materials Handling Equipment (MHE), Painting Equipment (Paint),
Packaging Equipment (PKG) and Testing Equipment (Test).  The
total list includes 171 items.  We have numbered the items for
easier reference and enclose a copy of the numbered list with
this ruling.  We note that without a precise description of each
piece of equipment, many of our comments have to be advisory in
nature.


                               -2-

     The imported merchandise in this case has been appraised
pursuant to transaction value, section 402(b) of the Tariff Act
of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19
U.S.C. 1401a(b)).

      The question presented is whether the equipment that OMC
supplies free of charge to OMEX constitutes an assist within the
meaning of section 402(h)(1)(A) of the TAA.  In this regard, we
note that section 402(h)(1)(A) of the TAA provides as follows:

     The term assist means any of the following if supplied
directly, 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 in-
          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, art work, design work,
          plans and sketches that are undertaken elsewhere than
          in the United States and are necessary for the
          production of the imported merchandise.

     The equipment and machinery in this case do not fall within
category (i) or (iii) of section 402(h)(1)(A) as it is neither
incorporated into the imported merchandise nor consumed in the
production of the imported merchandise.  Nor does the equipment
fall within category (iv), which addresses engineering, artwork
and design work.  Therefore, the question presented is whether
the equipment and machinery provided by OMC to OMEX constitute
"tools, dies, molds and similar items used in the production of
the imported merchandise" within the meaning of section
402(h)(1)(A)(ii) of the TAA.

     In TAA #4, dated September 4, 1980, Customs held that
general purpose equipment, such as sewing machines, ovens, drill
presses, etc., which was actually used in the production of the
merchandise was dutiable as an assist under section
402(h)(1)(A)(ii) of the TAA.  In TAA #18, dated February 27,
1981, Customs contrasted this equipment with general purpose
equipment such as emergency power generators, telephone switching
equipment, and air conditioning equipment, which was not used in
the actual production of the imported merchandise and was,


                               -3-

therefore, not considered to be an assist within the meaning of
section 402(h)(1)(A)(ii) of the TAA.  In HQ 542762, dated
January 14, 1983, we noted that the distinction is often based on
whether or not the equipment "works a change" on the merchandise
during production.

     As noted above, we are basing our determination as to
whether or not each of the items constitutes an assist, on the
brief description that has been provided for the item.  In
some instances the description is too brief to indicate whether
or not the item is actually used in the production of the
merchandise within the meaning of section 402(h)(1)(A)(ii) of the
TAA.  In those instances, we will be unable to make a
determination as to whether the item is an assist.

     With regard to the first category, GPO, items one through 25
are general office equipment and not of the type to be used in
the actual production of merchandise.  This equipment is used to
maintain air quality, and as part of the plumbing and electrical
systems in the office and plant.  In addition, these items
include equipment used to maintain the floors and docks, a
timeclock and a door.  Items 36 through 44 consist of equipment
used in the waste and water treatment systems of the plant and
office.  None of this equipment is used in the actual production
of the imported merchandise within the meaning of section
402(h)(1)(A)(ii) of the TAA or the above-cited rulings.

     Items 26 through 35 in the GPO category comprise a stamp
system that stamps the part number and date code on components of
the imported merchandise.  Although it is not clear from the
description when and how the stamping equipment is used, if it is
actually used in production to mark components of the imported
merchandise, it would constitute an assist within the meaning of
section 402(h)(A)(1)(ii).

     With regard to the second category, MAIN, we find that it is
not clear from the individual descriptions provided for most of
the items how those items are used and if they are used in the
production of the imported merchandise within the meaning of
section 402(h)(1)(A)(ii) of the TAA.  Section 402(h)(1)(A)(ii) of
the TAA specifically addresses "tools...and similar items used in
the production of the merchandise."  In Texas Apparel v. United
States, Slip-Op. 88-148 (1988), the court affirmed Customs'
position that even general purpose equipment may be considered
assists under section 402(h)(1)(A)(ii) of the TAA, if such
equipment is used directly in the production of the imported
merchandise.  Items 46 through 53 and items 62 through 72 are

                               -4-

described as either tools or tool and machinery maintenance
equipment.  Given the nature of the imported merchandise, i.e.,
small outboard motors and electrical and fuel assemblies, it is
possible the general purpose tools listed as items 46 through 53
and 62 through 72 would be used directly in the production of the
imported merchandise.  If so, those tools would constitute
assists as the court defined that term in Texas Apparel.
However, it is not clear from the given descriptions whether
these items are used in the actual production of the imported
merchandise or not.

     Items 45, 54 through 56, 61 and 71 in the MAIN category are
items related to the production and maintenance of the tools,
themselves, rather than to the production of the imported
merchandise.  Items 57 through 60 are cabinets and constitute
furniture.  As such none of these items are considered assists
within the meaning of section 402(h)(1)(A)(ii).

     The third category, MHE, consists mainly of equipment used
for moving and carrying material.  Items 73 through 81 and item
84 are conveyor belts used for a carburetor assembly line.  We
note that in C.S.D. 88-20, dated August 16, 1988, we held that a
conveyor system used to transport an article being produced from
one point in the manufacturing process to another was not an
assist because it was not "used in the production of the imported
merchandise" within the meaning of section 402(h)(1)(A)(ii) of
the TAA.  However, we are in the process of re-examining our
position with regards to this issue.

     Items 82 through 107 and item 109 consist of forklifts and
their parts, work tables, benches and loading bins.  Customs
held, in HQ 554993, dated May 19, 1988, that such items are not
used in the actual production of imported merchandise and are,
therefore, not assists within the meaning of section
402(h)(1)(A)(ii) of the TAA.

     Items 108 through 112 (with the exception of item 109) are
equipment for counting and weighing equipment.  This equipment is
not similar to a tool, die, or mold in that it does not "work a
change" on the article being produced.  Nor has it been indicated
that this equipment is used in the production of the imported

                               -5-

merchandise.  We do no find this equipment to constitute assists
within the meaning of section 402(h)(1)(A)(ii) of the TAA.

     The entire category of PAINT has not been sufficiently
desribed for us to make any determination as to whether those
specific items constitute assists.  If the paint systems consist
of equipment that is actually used in production, to paint the
imported merchandise or components thereof, then these items,
like the stamping system, would be assists within the meaning of
section 402(h)(1)(A)(ii) of the TAA.

     Category PKG itemizes packaging equipment.  This equipment
would necessarily be used after production of the imported
merchandise and as such, would not be assists within the meaning
of any of the categories in section 402(h)(1)(A).  In addition,
please note that packing costs are addressed in section
402(b)(1)(A) of the TAA and that under authority of that section
such costs are included in the transaction value of imported
merchandise if not otherwise included in the price actually paid
or payable.

     The final category, TEST, lists various testing equipment.
As noted in regard to each of the other categories, the
descriptions provided for the items in this category are not
sufficient for us to make a determination as to whether or not
these items are assists.  Generally, Customs has held that
testing equipment does not constitute assists because most
testing occurs after production, on the finished product.  (See
TAA #11, dated November 7, 1980; HQ 543587, dated January 28,
1986.)  However, in HQ 544508, dated June 19, 1990 we held that
testing equipment may constitute an assist within the meaning of
402(h)(1)(A)(ii) of the TAA if it can be shown that the equipment
was used for testing performed during the production process and
that such testing was essential to the production to the product.
A copy of that decision has been provided for your reference.

     Accordingly, we find that the equipment identified in items
45, 54 through 56, 61, 71, 82 through 112 do not constitute
assists within the meaning of section 402(h)(1)(A).  Items 130
through 140 do not constitute assists, but may be added to the
transaction value of the imported merchandise, as packing costs,
under section 402(b)(1)(A).  We are not able to make a
determination as to whether the remainder of the equipment

                               -6-

constitute assists because the descriptions provided are not
sufficient to indicate what each of those items are and/or how
they are used.  Therefore, with regard to the remaining items, we
suggest you obtain additional information as to whether they are
used directly in the production process of the imported
merchandise and utilize the guidelines we have provided above.


                           Sincerely,


                            John Durant