subcontract if such contract or subcontract is:

(a) For the sale or processing of an end product or of an article incorporated therein,

(b) For the sale, furnishing or installation of machinery, equipment or materials used in the processing of an end product or of an article incorporated therein,

(c) For the sale, furnishing or installation of machinery used in the processing of other machinery to be used in the processing of an end product or of an article incorporated therein,

(d) For the sale, furnishing or installation of component parts of or subassemblies for machinery included in paragraph (c) of this section and machinery. equipment and materials included in paragraph (b) of this section, and

(e) For the performance of services directly required for the performance of contracts or subcontracts included in paragraphs (a), (b), (c), and (d) of this section.

The term "component part" as used in paragraph (d) of this section shall be deemed to include materials and ingredients.

§ 1423.333-3 When machinery, equipment or materials "used in processing."

Under this interpretation machinery, equipment or materials will be deemed to be used in the processing of an end product or an article incorporated in an end product in all cases where such machinery, equipment or materials are used:

(a) To produce or otherwise operate, directly on an end product or an article incorporated in an end product by chemical, physical or mechanical methods; such, for example, as shaping, cutting, constructing, combining, refining, assembling, testing, inspecting or (in the case of end products) packaging;

(b) To transport within the contractor's plant an end product or an article incorporated in an end product or other articles used in connection with the production thereof;

(c) In connection with the repair, maintenance, equipping, or operation in the contractor's plant of machinery or equipment used in the production of an end product, or an article incorporated in an end product.

§ 1423.333-4 General effect of interpretation.

(a) In general it is intended to include as subject to renegotiation the sale of all machinery, equipment, materials and other articles which contribute directly to the actual production of an end item or an article incorporated therein, in connection with the physical handling of the item from the time of entry of the component materials to departure of the item from the plant in question and to include all machinery so used. Packaging materials and containers are regarded as a component part of the end product when they are used to package or contain the end product and are delivered with the end product to the Government; on the other hand, sales of packaging materials and containers which are not ultimately delivered to the Government are excluded from renegotiation.

(b) It is intended to exclude the sale of articles which contribute only indirectly to the actual manufacturing process, such as products used for general plant maintenance, including fuel and equipment to produce light, heat and general power requirements and such as equipment needed for general office maintenance, including all types of office machinery and supplies, and such as safety equipment and clothing. It is not intended to exclude from renegotiation any article sold to a contractor when the items are to be ultimately resold to the Government either as end products or as component parts included therein. § 1423.334 Subject subcontracts. [Amdt. 5, 15 F. R. 169, Jan. 12, 1950] § 1423.334-1 General.

All subcontracts required to contain the Renegotiation Article are subject to the Renegotiation Act of 1948. The absence of the Renegotiation Article from any subcontract does not, however, preclude the application of the act if such subcontract is one required to contain the Article.

[Amdt. 5, 15 F. R. 169, Jan. 12, 1950] § 1423.334-2 Amendments to non-subject subcontracts.

An amendment to a subcontract not required to contain a Renegotiation Article is itself a subcontract subject to the act if it provides for new or additional procurement, is in excess of $1,000, and is under a subject contract or subcontracts. For example if A and B entered into a subcontract on May 1, 1948, for

the sale and purchase of 100 units at $5.00 per unit and they amend such subcontract on June 1, 1948, to obligate themselves to buy and sell 500 additional units at the same price, such increase being under a subject contract or subcontract, there is a subcontract subject to renegotiation for the 500 additional units.

[Amdt. 5, 15 F. R. 169, Jan. 12, 1950]

§ 1423.334-3

Subcontracts under contracts made subject to renegotiation under Second Deficiency Appropriation Act, 1948.

Section 401 of the Second Deficiency Appropriation Act, 1948, provides that the Secretary of Defense may direct the insertion of an article incorporating the Renegotiation Act of 1948 in any contracts for the procurement of ships, aircraft, aircraft parts, and the construction of facilities or installations outside the continental United States. The Secretary of Defense by memorandum dated 30 June 1948 directed that a clause incorporating the Renegotiation Act of 1948 be included in all contracts for the procurement of aircraft and aircraft parts entered into by or on behalf of the Department of the Navy or the Department of the Air Force which obligate any funds made available for obligation in the fiscal year 1949. (See § 1423.331-1 (b)). All subcontracts in excess of $1,000 under contracts made subject to renegotiation pursuant to this authority are subject to the Renegotiation Act of 1948 and the regulations in this subchapter to the same extent and in the same manner as subcontracts under contracts entered into under the authority of the Supplemental National Defense Appropriation Act, 1948.

[Amdt. 5, 15 F. R. 169, Jan. 12, 1950]

§ 1423.334-4 Patent licenses as sub

contracts.

Licenses or other agreements for the use of processes or inventions used in performing subject contracts and subcontracts are subcontracts subject to renegotiation unless exempted.

[Amdt. 5, 15 F. R. 169, Jan. 12, 1950]

§ 1423.335 Contracts and subcontracts involving real property.

§ 1423.335-1 Subcontracts for existing real property.

(a) The term "subcontract" is construed to exclude agreements for the purchase or rental of real property by contractors and subcontractors since the

term refers to the making or furnishing of any article which is construed to mean "any material * or other personal property." (See § 1421.122(g) of this subchapter.)

(b) The exclusion discussed in this section governs agreements for existing real property, but does not apply to agreements for fixtures or for improvements to or construction of real property which are discussed in § 1423.335-2. § 1423.335-2 Agreements for fixtures, construction and improvements on real property.

(a) If an agreement is for work or articles which become real property in the course of its performance, as distinguished from existing real property, the principles stated in this section govern.

(b) If an agreement to sell, furnish or install machinery, equipment, materials or other personal property would otherwise constitute a renegotiable contract or subcontract, the fact that such property is to be installed in a building or otherwise affixed to real estate and will be treated as real property for some purposes does not exclude the agreement from renegotiation.

(c) If a contract for the construction of a building or improvements on or to real property is entered into by the Government under the authority of the Supplemental National Defense Appropriation Act, 1948 (or is otherwise made subject to renegotiation pursuant to section 401 of the Second Deficiency Appropriation Act, 1948, or by section 622 of the National Military Establishment Appropriation Act, 1950 or by section 618 of the General Appropriation Act, 1951), such contract is subject to renegotiation unless exempted. If a contract for the construction of a building or improvements on or to real property is entered into by someone other than the Government, such contract is nevertheless subject to renegotiation if, at the time such contract was made, the Government pursuant to a contract entered into under the authority of the Supplemental National Defense Appropriation Act, 1948, (or otherwise made subject to renegotiation pursuant to section 401 of the Second Deficiency Appropriation Act, 1948, or by section 622 of the National Military Establishment Appropriation Act, 1950 or by section 618 of the General Appropriation Act, 1951) is to obtain title to such building or improvements either immediately or ultimately. Likewise all

subcontracts under such a renegotiable contract, for furnishing services, or articles, such as building materials and structural steel, which are personal property when furnished, but which became real property during the course of construction, are renegotiable unless exempted, and so are subcontracts for furnishing any machinery and equipment installed in the building.

(d) If an agreement is for the construction of a building or improvement on or to real property for a contractor or subcontractor for the purpose of performing a renegotiable contract or subcontract and if the Government is not to acquire title to such building or improvements, either immediately or ultimately, pursuant to a contract entered into under the authority of the Supplemental National Defense Appropriation Act, 1948, (or a contract otherwise made subject to renegotiation pursuant to section 401 of the Second Deficiency Appropriation Act, 1948, or by section 622 of the National Military Establishment Appropriation Act, 1950 or by section 618 of the General Appropriation Act, 1951) then except as provided in paragraph (b) of this section, such agreement and subcontracts thereunder are not subject to renegotiation.

(e) If the subject matter of a subcontract comprises components which would ordinarily be regarded as machinery, equipment, materials or other personal property and also components such as buildings, structures or similar improvements to real estate then that part of the receipts or accruals under the subcontract attributable to the components determined by the renegotiating agency to be machinery, equipment, materials or other personal property will not be excluded from renegotiation, although no segregation of the consideration for such components is made in the subcontract, and although such machinery, equipment, materials or other personal property are to be installed in a building, structure or similar improvement to real estate or otherwise affixed to real estate. In making such a segregation, there will ordinarily be deemed attributable to machinery, equipment, materials or other personal property that part of the receipts or accruals under the subcontract allocable to the sale or installation of components used in processing within the meaning of § 1423.3333, and there will be deemed attributable to real property that part of the receipts

or accruals under the subcontract allocable to the sale or construction of land, buildings, structures and similar non-productive items.

[14 F. R. 1635, Apr. 7, 1949, as amended by Amdt. 5, 15 F. R. 169, Jan. 12, 1950, Amdt. 10, 15 F. R. 6987, Oct. 19, 1950]

§ 1423.336 Manufacturers' agents and dealers; subcontracts.

(a) Contracts between manufacturers and their representatives are subject to renegotiation as subcontracts if the representative is performing, or agrees to make available on request, engineering, mechanical, or other services related to the performance of one or more subject contracts or subcontracts. For example, manufacturers' agents in the machine tool industry customarily hold themselves ready to furnish engineering advice, mechanical service, and advice on training in the use of tools. By contract or custom the manufacturer usually pays the commissions of the agent whether or not these services are used, and charges the amount into the cost of the tool. These activities comprise part of the work required for the performance of a subject contract or subcontract.

(b) When a manufacturer's representative also acts as dealer his sales of articles under a subject contract or subcontract are subject to renegotiation whether the articles are delivered from his own inventory or shipped direct by the manufacturer.

Subpart D-Mandatory Exemptions and Exclusions from Renegotiation § 1423.340 Scope of subpart.

Subpart C of this part deals with the general interpretation of the coverage of the act and with the meaning of the terms "contract" and "subcontract". Subsection (d) of the act contains two provisions dealing with exemptions:

(a) Contracts and subcontracts of the class or type described in subsection (i) (1) of the Renegotiation Act of February 25, 1944, as amended, are exempt from renegotiation. Such exemptions, generally referred to as "mandatory exemptions", are described in this subpart.

(b) The Secretary, in his discretion, may exempt "any other contract or subcontract both individually and by general classes or types". Such exemptions, generally referred to as "permissive exemptions", are described in Subpart E of this part.

[14 F. R. 1635, Apr. 7, 1949, as amended at 14 F. R. 3080, June 8, 1949]

§ 1423.341 Mandatory exemptions.

(a) Contracts entered into between governmental agencies and subcontracts thereunder are exempt by reference to subsection (i) (1) (A) of the Renegotiation Act of February 25, 1944, as amended. (See §§ 1423.342 to 1423.342-2.)

(b) Contracts and subcontracts for certain raw materials are exempt by reference to subsection (i) (1) (B) of the Renegotiation Act of February 25, 1944, as amended. (See §§ 1423.343 to 1423.343-4.)

(c) Contracts and subcontracts for certain agricultural commodities are exempt by reference to subsection (1) (1) (C) of the Renegotiation Act of February 25, 1944, as amended. (See § 1423.343-2.)

(d) Contracts and subcontracts with certain tax-exempt institutions are exempt by reference to subsection (i) (1) (D) of the Renegotiation Act of February 25, 1944, as amended. See §§ 1423.344 to 1423.344-2.)

(e) Construction contracts awarded as a result of competitive bidding are exempt by reference to subsection (1) (1) (E) of the Renegotiation Act of February 25, 1944, as amended. (See §§ 1423.345 to 1423.345-2.)

(f) Subcontracts under exempt contracts and subcontracts are exempt by reference to subsection (i) (1) (F) of the Renegotiation Act of February 25, 1944, as amended. (See §§ 1423.346 to 1423.346-2.)

§ 1423.342

Contracts with other governmental agencies and subcontracts thereunder.

§ 1423.342-1 Statutory provision.

Subsection (i) (1) (A) of the Renegotiation Act of February 25, 1944, as amended, adopted by reference by subsection (d) of the 1948 Act, exempts the following:

(A) Any contract by a Department with any other department, bureau, agency or governmental corporation of the United States or with any Territory, possession, or State or any agency thereof or with any foreign government or any agency thereof. § 1423.342-2 Interpretation and application of exemption.

This provision is construed as excluding from renegotiation any contract between any of the departments or agencies of the United States or between any such department or agency and any Territory, possession, State or any agency thereof or any foreign government or agency thereof.

(a) Statutory exemption. Subsection (i) (1) (B) of the Renegotiation Act of February 25, 1944, as amended, adopted by reference by subsection (d) of the 1948 Act, exempts the following:

(B) Any contract or subcontract for the product of a mine, oil or gas well, or other mineral or natural deposit, or timber, which has not been processed, refined, or treated beyond the first form or state suitable for industrial use;

(b) Interpretation and application of exemption. In determining whether or not a particular product is an “exempted product" under the foregoing exemption, the following principles shall govern:

(1) Exempted products. The phrase "other mineral or natural deposit” shall be interpreted to include only mineral or natural deposits of a wasting or depletable character similar to products "of a mine, oil or gas well." Accordingly, water, sea water and air, and products derived therefrom, are not considered to be other mineral or natural deposits within the meaning of the act, and contracts or subcontracts therefor, or for products derived therefrom, shall be subject to renegotiation.

(2) State at which exemption terminates. In general a product will be considered to be an exempted product until it has arrived at its dispersal point, i. e., the point at which a substantial proportion of the product is used by the ultimate consumer, or by industries other than the industry of origin. The industry of origin includes not only the primary industry of extraction or severance, but also any processing, refining or treatment directly supplementing its extraction or severance or to produce one or more of the chemical elements or compounds present in it in the state in which it may be found in abundance in nature; but excludes other processing, refining, or treatment to produce various end products for the ultimate consumer, or a substantial variety of products which vary materially in size, shape or content from the original product.

(3) Combination of several materials. Where substantial quantities of two or more materials or ingredients are combined to produce a product for industrial use, the product resulting from such

(5) By-products.

Where a process for making a product or material subject to renegotiation under the above tests also produces by-products, such byproducts shall be treated as subject to renegotiation since any benefits resulting from use or sale of such by-products operate in substance to reduce the cost of the principal product. The principle of the preceding sentence is inapplicable to by-products which would otherwise be exempt under this paragraph. In the case of by-products resulting from processes principally designed to produce an "exempted product” under the above tests, such by-products shall be treated as "exempted products" if they are not further processed, refined or treated. If further processing, refining or treatment of such by-products takes place, the status of the ultimate product resulting will be determined in accordance with the general principles set forth above.

(c) A list of products which, subject to the foregoing interpretation are considered exempt, is set forth in §§ 1428.841 and 1428.841-1 of this subchapter. § 1423.343-2

Agricultural commodities.

(a) Statutory exemption. Subsection (1) (1) (C) of the Renegotiation Act of February 25, 1944, as amended, adopted by reference by subsection (d) of the 1948 Act, exempts the following:

(C) Any contract or subcontract for an agricultural commodity in its raw or natural state, or if the commodity is not customarlly sold or has not an established market in its raw or natural state, in the first form or state, beyond the raw or natural state, in which it is customarily sold or in which it has an established market. The term “agricultural commodity" as used herein shall include but shall not be limited to:

(1) Commodities resulting from the cultivation of the soil such as grains of all kinds, fruits, nuts, vegetables, hay, straw, cotton, tobacco, sugar cane, and sugar beets;

(11) Natural resins, saps and gums of trees; (iii) Animals such as cattle, hogs, poultry, and sheep, fish and other marine life, and the produce of live animals, such as wool, eggs, milk and cream;

(b) Interpretation and application of exemption (1) Interpretation. The purpose of this provision is to exempt from renegotiation farmers, fruit growers, livestock raisers, fishermen and other basic producers of agriculture commodities and those who trade in such products or handle or transport them without processing them; it is not intended to exempt canners, processors, manufacturers and others who acquire products of this type from the basic producer and process them to a higher form or state. In order to qualify for exemption the product contracted for must be an agricultural commodity in its raw or natural state, or if such a commodity is not customarily sold or does not have an established market in its raw or natural state, in the first form or state beyond the raw or natural state in which it is customarily sold or in which it has an established market.

(2) Application. A commodity will be deemed to be an agricultural commodity in its raw or natural state only so long as it has not undergone some process of treatment or fabrication. In the case of fruits, vegetables and other like products this state does not ordinarily extend beyond the state in which such products are harvested. In the case of livestock, it terminates at the time the animal is slaughtered. Where an agricultural commodity is not customarily sold or does not have an established market in its raw or natural state as above defined and is no longer in such state the exempt status of such commodity will terminate with the state in which the commodity is first customarily sold or has an established market, and, with the exception of the produce of live animals which are specifically exempted, the exemption will not apply to any derivative products which are derived from such commodity in the state in which it is first sold, whether as a result of division, separation or further treatment or processing For the purposes of determining whether an agricultural commodity is customarily sold or has an established market, regard will be given to the entire field in which such commodity is produced or marketed