United States v. Douglas Aircraft Co., Customs Appeal No. 74-26.
| Decision Date | 20 February 1975 |
| Docket Number | Customs Appeal No. 74-26. |
| Citation | 510 F.2d 1387 |
| Parties | The UNITED STATES, Appellant, v. DOUGLAS AIRCRAFT CO., Appellee. |
| Court | U.S. Court of Customs and Patent Appeals (CCPA) |
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Carla A. Hills, Asst. Atty. Gen., Andrew P. Vance, Chief, Customs Section, Bernard J. Babb, New York City, for the United States.
Glad, Tuttle & White, Los Angeles, Cal., attys. of record, for appellee. Edward N. Glad, Los Angeles, Cal., of counsel.
Before MARKEY, Chief Judge, and RICH, BALDWIN, LANE and MILLER, Associate Judges.
This appeal is from the judgment of the United States Customs Court, 72 Cust.Ct. 10, C.D. 4498, 370 F.Supp. 1404 (1974), denying appellant's motion for judgment on the pleadings and granting appellee-importer's motion for summary judgment, involving appraisement of the processing subject to duty of a wing assembly and tail assembly (for a DC 9 airplane) which were exported from the United States to Canada for further processing and then returned to the United States for further processing. We reverse.
The district director at the port of Detroit found the value of the processing in Canada subject to duty to be $285,552 under item 806.30 of the Tariff Schedules of the United States in accordance with headnote 2, Subpart B, Part 1, Schedule 8. Appropriate extracts from the law are quoted below.
Schedule 8. — Special Classification Provisions
Part 1. Articles Exported and Returned
* * * * * *
Subpart B. Articles Advanced or Improved Abroad
Subpart B headnotes
* * * * * *
2. Articles repaired, altered, processed, or otherwise changed in
condition abroad. — The following provisions apply only to items
806.10, 806.20, and 806.30
(a) The value of repairs, alterations, processing, or other change in
condition outside the United States shall be —
(i) the cost to the importer of such change; or
(ii) if no charge is made, the value of such change
as set out in the invoice and entry papers; except that, if the
appraiser concludes that the amount so set out does not represent a
reasonable cost or value, then the value of the change shall be
determined in accordance with section 402 or 402a of this Act
* * * * * *
Articles returned to the United States after having been exported to
be advanced in value or improved in condition by any process of
manufacture or other means
* * * * * *
806.30 Any article of metal (except
precious metal) manufactured in the
United States or subjected to a
process of manufacture in the United
States, if exported for further
processing, and if the exported
article as processed outside the
United States, or the article which
results from the processing outside
the United States, is returned to
the United States for further
processing ......................... A duty upon the value of
such processing outside the
United States (see headnote
2 of this subpart)
Included in the $285,552 value determined by the Customs Service for the processing in Canada was the amount of $49,972, representing the pro rata share1 of the cost of Canadian-made tooling, which appellee-importer contended it furnished the Canadian processor. Appellee-importer argues that none of the cost of such tooling should be included in the value of the processing subject to duty.
The Customs Court considered the circumstances of this case to be directly analogous to those in so-called "separable" appraisements and stated that the sole question was the propriety of including the disputed separable amount of $49,972 in the value determined by the Customs Service. In holding that such inclusion was not proper, the Customs Court concluded that, in the absence of extraordinary circumstances, the value of processing is the "cost to the importer," as provided by headnote 2(a)(i), and that this simply means the amount charged by the processor. It reasoned that the immediately following reference in headnote 2(a)(ii) to the possible circumstance "if no charge is made" reinforced its conclusion. And it relied on the Customs Court's decision in National Tube Co. v. United States, 28 Cust.Ct. 603, Reap.Dec. 8107 (1952), for its further conclusion that a distinction between tooling expenses incurred in the United States and those incurred outside the United States is unjustified. Although recognizing that the present statutory language (value of "processing") differs from the language involved in the National Tube case (value of "repairs or alterations"),2 it said that the transition to the present language was "a natural one without . . . any new distinctions or meanings . . .."
OPINIONand further:
articles exported from the United States for repairs may be returned upon payment of a duty upon the value of the repairs at the rate at which the article itself would be subject if imported . . ..
The above portions of paragraph 1615 were substantially incorporated into subparagraphs 1615(a) and 1615(g), respectively, by the Customs Administrative Act of 1938, ch. 679, Pub.L. No. 721, 52 Stat. 1092. Subparagraph 1615(g) then read as follows:
(g) Any article exported from the United States for repairs or alterations may be returned upon the payment of a duty upon the value of the repairs or alterations at the rate or rates which would apply to the article itself in its repaired or altered condition . . ..
Thus, it is seen that the words "or alterations" were added to "repairs" by the 1938 Act.
Prior to the amendment by the Customs Simplification Act of 1954 which added "processing" to "repairs" and "alterations" in subparagraph 1615(g)(4), it appears that, in the case of articles sent by U.S. manufacturers along the Canadian border to Canada for processing and return to the United States for additional processing, duty was imposed on not only the value of the Canadian processing but also on the value of the article in its original exported form. Such treatment was based on subparagraph 1615(g) of the Tariff Act of 1930, as amended by the 1938 Act, with interpretation by the Customs Service of "repairs" and "alterations" being limited chiefly to those of a mechanical nature on equipment such as locomotives and buses. It was objected that imposing duty on the value of the article in its original exported form constituted a duty on American material and American labor. Hearings on H.R. 5106 Before the House Comm. on Ways and Means, 83d Cong., 1st Sess., 199-200 (1953).
Although addition of the word "processing" appears to have been designed to alleviate hardship to U.S. manufacturers arising from the narrow interpretation of "repairs" and "alterations," there is nothing in the legislative history to indicate that, when Congress provided, commencing with the 1954 Act, for "cost" or "reasonable cost" in determining the "value" of processing, there was any intention that "cost" be interpreted other than according to sound business accounting practice. Thus, cost of processing would include both direct and indirect costs. Indirect costs include factory overhead, which is normally added during the entire processing operation. S. Davidson, Handbook of Modern Accounting 38-16 (1970). Factory overhead is all manufacturing costs3 other than direct materials and direct labor and includes depreciation of the factory buildings and equipment. G. Johnson & J. Gentry, Finney and Miller's Principles of Accounting 413 (Introductory 7th ed. 1970). Longer-life tools are set up as an asset and depreciated at an appropriate average rate; tools with a short life may be handled in a variety of ways, including charging their cost to production cost. R. Wixon, W. Kell, & N. Bedford, Accountants Handbook 16-34 (5th ed. 1970). When amortization rather than depreciation is used, a "customary" approach is to divide the amount to be amortized by units of expected work volume in order to obtain comparative costs per unit of work produced. W. Fiske & J. Beckett, Industrial Accountant's Handbook 377 (1954). Needless to say, only the costs allocable to a particular job order or contract are chargeable thereto. American Propeller & Mfg. Co. v. United States, 17 F.Supp. 215, 83 Ct. Cls. 100 (1936); Missile Systems Corp., ASBCA No. 8153, 64 BCA par. 4398 (1964).
Appellant states that the disputed charges in the National Tube case "essentially were for charges on articles designed and produced in the United States and sent to Canada, whereas the tooling in dispute herein was Canadianmade." However, it appears that the disputed charges in National Tube were for special equipment (designed in the United States) which was manufactured in Canada. See National Tube Co. v. United States, 26 Cust.Ct. 461, 462, Reap.Dec. 7923 (1950). This identity between National...
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