VAL CO:R:C:V 544680 DPS
Ronald W. Gerdes, Esq.
Sandler, Travis & Rosenberg, P.A.
1341 G Street, N.W.
Washington, D.C. 20005-3105
RE: Price Actually Paid or Payable
Dear Mr. Gerdes:
This is in response to your ruling request submitted on
behalf of your client, Dino di Milano Corporation ("Dino" or
"importer"), concerning the appraisement of wearing apparel.
Subsequent to your initial ruling request, you met with
Headquarters attorneys, provided further information concerning
the specifics of the proposed transaction, and made a follow-up
submission in support of your client's proposal.
FACTS:
Dino imports wearing apparel from both the Caribbean and the
Far East. In both of these operations, the importer experiences
difficulties with respect to timely shipments and shipments which
meet the quality that is expected. Regardless of the method of
payment for the merchandise, either letter of credit or open
account, the foreign producer or assembler maintains a
significant amount of leverage over the importer. Through this
ruling request, counsel seeks Customs assistance in addressing
the problem of defective and late merchandise to allow more
leverage by the U.S. importer over foreign suppliers.
Specifically, the ruling request proposes the establishment
of a system to account for defective and late shipped merchandise
whereby a certain price is guaranteed to the foreign assembler/
manufacturer at the time the merchandise is sold for exportation
to the United States; and a second amount, or bonus, would be
paid only if merchandise is timely shipped and meets the agreed
to quality standards. The amount of the bonus payment would vary
depending upon the size of the order, the reputation of the
producer or assembler in meeting the importer's needs and the
negotiating levels of the two parties.
You offer the following example of the proposed arrangement.
On a shipment which might traditionally be sold for $100,000 FOB
port of exportation, Dino would negotiate a price of $85,000 FOB.
This would be the only amount which is guaranteed to the foreign
producer or assembler when the merchandise is shipped, i.e., the
only payment which is payable upon sale for exportation to the
U.S. If the merchandise is shipped timely, an additional $5,000
would be due at the time of shipment. Counsel asserts that the
additional $5,000 would constitute a renegotiation of the FOB
price to $90,000 prior to exportation. It would not be until
sometime after shipment and entry that the importer would have
the opportunity to review the quality of the imported
merchandise. After this review, all or some of the remaining
$10,000 would be paid.
Under the proposed scenario, you state that the dutiable
value of the merchandise at the time of importation would be
$90,000, the original $85,000 price plus a $5,000 bonus for
timely delivery which was agreed to prior to exportation.
In the event some of the merchandise was defective, but an
additional payment was made, counsel indicates that this
additional payment would be dutiable and would be reported to
Customs by the importer within approximately thirty days of the
date of importation. While your submission addresses defective
merchandise, the appraisement question focuses on the price
actually paid or payable for the subject imported merchandise.
ISSUE:
Whether the price actually paid or payable for imported
merchandise subject to a conditional pricing arrangement can be
determined.
LAW AND ANALYSIS:
For the purpose of this ruling request, we assume that
transaction value is the proper basis of appraisement.
Transaction value is defined in 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)), as the price actually paid or payable for
merchandise when sold for exportation to the United States.
The term price actually paid or payable means the total payment,
exclusive of certain international transportation charges, made,
or to be made, for imported merchandise by the buyer to, or for
the benefit of, the seller. Section 402(b)(4)(A) TAA.
In the ruling request, citing TAA No. 60 as support, you
argue that importer's use of the invoiced cost as the base amount
upon which duty may be deposited, is akin to a fixed formula or
methodology for arriving at a specified amount. Further
adjustments are made if the actual price ultimately paid varies
because the exported merchandise conforms to agreed upon
standards. That reconciliation is to be provided to Customs and
duty deposited upon any additional amounts paid to the exporter.
Customs does not consider the foregoing arrangement to be a
"formula" because the final determination to make additional
payments depends on a subjective factor within the control of the
importer, i.e., importer's inspections. Generally, pricing
formulas with contingencies involve contingencies over which
neither party has control, such as currency fluctuations. See
HRL 543089, dated June 20, 1984. Accordingly, we do not
characterize importer's proposal as a formula.
Here, the issue is whether we have a price actually paid or
payable for the imported merchandise. If the appropriate Customs
official at the port of entry is satisfied that all relevant
information and documentation regarding the total price actually
paid or payable (including "bonus" payments) is presented within
an agreed upon period of time, and the District Director has
agreed to hold open entries pending submission of such
information, then we would be satisfied that the merchandise is
properly appraised. Conversely, if the appropriate Customs
official is not satisfied that the revenue is adequately
protected, then we have no further comments to make on this
matter.
Another way of handling the problem of defective merchandise
was examined in HRL 544762, dated January 17, 1992. There, a set
percentage, labeled as "defective allowance," was deducted from
each original price to arrive at the adjusted price. The
defective allowances purportedly represented the amount of goods
that were either damaged in transit or defective, and ranged from
1-7%, depending on the vendor and its prior two year history of
shipping defective merchandise. The importer paid the foreign
vendor a price which had been discounted for defective
merchandise. Consequently, the price actually paid for the
imported merchandise was the discounted or adjusted price.
HOLDING:
With regard to importer's proposal pertaining to the price
actually paid or payable, Customs is authorized to make
allowances on an entry by entry basis, provided the appropriate
Customs official is satisfied that the price actually paid or
payable for the imported merchandise, including bonuses, is
reported to Customs.
Sincerely,
John Durant, Director