RR:IT:VA 546056 KCC
Director, Regulatory Audit Division
U.S. Customs Service
610 South Canal Street, 9th Floor
Chicago, Illinois 60607
RE: Internal Advice; alleged interest charges; T.D. 85-111 and
Clarification; TAA #43; HRL 545277; price actually paid or
payable; HRL 545663; Generra Sportswear Co.; Chrysler;
written financing arrangement
Dear Director:
This is in response to your memorandum dated July 11, 1995 (
file AUD-1-O:A:SL: AAW), requesting internal advice concerning
the dutiability of certain costs which the parties refer to as
interest disclosed in your audit of North American Lighting, Inc.
("NAL"). A memorandum from the Port Director in St. Louis,
Missouri, dated March 1, 1995, and NAL's position paper in
response to the audit findings were taken into consideration in
rendering this decision. We regret the delay in responding.
FACTS:
The importer, NAL, is in a joint venture with three parent
companies, Koito Manufacturing of Japan ("Koito") (40%
ownership), Ichikoh Industries of Japan ("Ichikoh") (10%
ownership), and Hella North American Inc. ("Hella") (50%
ownership), in which NAL purchases maintenance equipment and
component parts from each of the parent companies, or sellers,
for use in the manufacture of automotive lighting products.
NAL's imports are appraised using transaction value. Your audit
disclosed that NAL is reimbursing Koito and Ichikoh for certain
costs referred to by the parties as interest.
You state that NAL reimburses Ichikoh for the alleged
interest costs on substantially overdue items. You found that
NAL reimbursed Ichikoh for three months during the period May
1990 to February 1993. We can not rule on these payments as no
detailed information was presented by your office or NAL.
You state that NAL reimburses Koito for costs incurred by
Koito due to NAL's delayed payment settlement. The terms of the
sale are D/A 90 days after bill of lading for component parts and
D/A 180 days after bill of lading for maintenance equipment. A
"D/A" contract is a documents against acceptance financing
arrangement. You were informed that Koito factors its account
receivables from NAL to a foreign bank; Koito sells the NAL
invoices to a foreign bank. The foreign bank then sends NAL a
bill of exchange, which is signed and sent back to the foreign
bank, showing acceptance. Therefore, you were informed that a
transfer of ownership takes place between Koito and the foreign
bank and, thereafter, at the end of the 90 or 180 day period, NAL
pays the foreign bank for the imported merchandise.
You found that it is NAL's practice to pay invoices due in a
particular month at the end of the month. At the end of the
month, after payment of invoices to the foreign bank, NAL accrues
in its books "interest" payments, based on NAL's calculation of
the number of days late and the last "interest" rate charged by
the foreign bank. After the foreign bank receives late payment
on the NAL invoices, it charges Koito "interest" on those late
payments which Koito makes directly to the foreign bank. After
NAL makes payment for the invoices at the end of the month and
after Koito pays the foreign bank for the accumulated "interest"
for NAL's late payments, Koito sends NAL a payment status letter
and spreadsheet. The payment status letter informs NAL of the
total interest charged by the foreign bank and paid by Koito for
the invoices paid in the last month and requests reimbursement
for the interest charges from NAL. The spreadsheet shows each
invoice paid late by NAL and calculates the total amount due per
invoice. Your review disclosed that NAL directly reimburses
Koito, not the foreign bank, for the costs incurred because of
NAL's delayed settlement on an invoice by invoice basis. You
state that approximately 94% of the invoices from May 1992 to
March 1994 required a reimbursement.
You state the payments at issue made to Koito are indirect
payments which are part of the price actually paid or payable.
You contend that the submitted documents, referenced below, do
not constitute a written financing arrangement and, therefore, do
not meet the criteria set forth in T.D. 85-111, so that these
costs are not excluded from the price actually paid or payable
for the imported merchandise.
It is the position of the St. Louis Port Director that the
charges at issue are not included in the price actually paid or
payable because the criteria set forth in Treasury Decision
(T.D.) 85-111 have been met. The Port Director argues that the
payments made by NAL are, in effect, "interest" costs essentially
paid to the foreign bank and are not associated directly with the
cost of the imported merchandise. The Port Director states that
the seller, Koito, does not receive a financial benefit since a
previous transfer of ownership and the total cost of the
merchandise already took place between the Koito and the foreign
bank.
NAL states that the charges at issue do not constitute
indirect payments nor are they part of the price actually paid or
payable. Therefore, NAL states that the charges are not
dutiable. NAL states that the charges are not incurred by Koito
from its foreign bank. NAL states that charges were incurred by
NAL for payment beyond the specified time period according to the
terms of payment for the imported merchandise. NAL contends that
the criteria set forth in T.D. 85-111 have been met. In support
of this position, NAL has offered an invoice, a purchase order,
and a General Terms and Conditions statement to be taken together
as a whole as evidence of a written financing agreement. The
General Terms and Conditions statement dated May 1, 1993, states
that the payment for basic purchases is "90 days from Bill of
Lading Date" and for molds for plastic products is "180 days from
Bill of Lading Date." The General Terms and Conditions statement
reads that "Interest will accrue on items past due from terms
stated above."
ISSUE:
Whether the payments referred to by the parties as interest
and made by importer, NAL, to the seller, Koito, are part of the
transaction value of the imported merchandise.
LAW AND ANALYSIS:
For the purpose of this response, we are assuming that
transaction value is the appropriate basis of appraisement.
Transaction value is defined in 402(b)(1) of the Tariff Act of
1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C.
1401a(b); TAA) as the "price actually paid or payable for the
merchandise" plus amounts for the five enumerated statutory
additions in 402(b)(1). The parties are related, therefore
pursuant to 402(b)(2)(B) of the TAA, transaction value is
acceptable only if an examination of the circumstances of the
sale indicates that the relationship between the NAL and Koito
did not influence the price actually paid or payable or if the
transaction value of imported merchandise closely approximates
the transaction value of identical or similar merchandise in
sales to unrelated buyers in the U.S. or the deductive or
computed value for identical or similar merchandise. This ruling
does not address the acceptability of transaction value.
The term price actually paid or payable is defined in
402(b)(4)(A) of the TAA as:
...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.
In this case, the payments made by NAL were paid directly to
Koito, not the foreign bank. This is evidenced by the payment
status letter from Koito to NAL dated February 14, 1993, which
states that:
The bank interests have been incurred by Koito due to your
[NAL] delayed D/A settlement.
Your prompt payment of the interest (X Yen as of
January) to Koito would be highly appreciated.
There is a rebuttable presumption that all payments made by
a buyer to a seller, or party related to a seller, are part of
the price actually paid or payable. See, HRL 545663 dated July
14, 1995. This position is based on the meaning of the term
"price actually paid or payable" as addressed in Generra
Sportswear Co. v. United States, 8 CAFC 132, 905 F.2d 377 (1990).
In Generra, the court considered whether quota charges paid to
the seller on behalf of the buyer were part of the price actually
paid or payable for the imported goods. In reversing the
decision of the lower court, the appellate court held that the
term "total payment" is all-inclusive and that "as long as the
quota payment was made to the seller in exchange for merchandise
sold for export to the United States, the payment properly may be
included in transaction value, even if the payment represents
something other than the per se value of the goods." The court
also explained that it did not intend that Customs engage in
extensive fact-finding to determine whether separate charges, all
resulting in payments to the seller in connection with the
purchase of imported merchandise, were for the merchandise or
something else.
Additionally, we note that in Chrysler Corporation v. United
States, CIT Slip Op. 93-186 (September 22, 1993), the Court of
International Trade applied the Generra standard and determined
that although tooling expenses incurred for the production of the
merchandise were part of the price actually paid or payable for
the imported merchandise, certain shortfall and special
application fees which the buyer paid to the seller were not a
component of the price actually paid or payable. With regard to
the latter fees, the court found that the evidence established
that the fees were independent and unrelated costs assessed
because the buyer failed to purchase other products from the
seller and not a component of the price of the imported engines.
Therefore, this presumption may be rebutted by evidence which
clearly establishes that the payments, like those in Chrysler,
are completely unrelated to the imported merchandise.
Based on the evidence presented the imported merchandise was
not actually sold to the bank but rather it was the accounts
receivable that were sold. Consequently, Koito and not the bank
is considered the seller of the imported merchandise. The
"interest" payments made by NAL were paid directly to Koito, the
seller, and not the foreign bank. Koito is receiving the benefit
from such payments. Additionally, the payments are not unrelated
to the imported merchandise as a part of an overall agreement
like the shortfall and special application fees in Chrysler. In
this case, the payments made by NAL are based on an invoice by
invoice basis which relate directly to individual shipments.
Thus, these payments are part of the total payment to the seller,
Koito, for the imported merchandise and are part of the price
actually paid or payable.
Next, we must determine whether these payments nonetheless
are excluded from transaction value based on the criteria set
forth in T.D. 85-111 dated July 17, 1985, and the Statement of
Clarification for T.D. 85-111 dated July 17, 1989 (54 F.R. 29973)
(the "Clarification"). T.D. 85-111 states that interest
payments, whether or not included in the price actually paid or
payable for imported merchandise, shall not be regarded as part
of the customs value provided that:
(a) The charges are distinguished from the price of the
goods;
(b) The financing arrangement was made in writing;
(c) Where required, the buyer can demonstrate that
- Such goods are actually sold at the price declared as
the price actually paid or payable, and
- The claimed rate of interest does not exceed the level
for such transactions prevailing in the country where,
and when the financing was provided.
T.D. 85-111 is to apply whether the financing is provided by the
seller, a bank or another natural or legal person, and if
appropriate, where the merchandise is valued under a method other
than transaction value.
In the Clarification, Customs stated that for purposes of
T.D. 85-111, "the term 'interest' encompasses only bona fide
interest charges, not simply the notion of interest arising out
of delayed payment." Customs further added that "bona fide
interest charges are those payments that are carried on the
importer's books as interest expenses in conformance with
generally accepted accounting principles." We do not have enough
information to determine whether the payments at issue are "bona
fide interest charges." However, even assuming the charges are
bona fide interest charges, they do not satisfy all the criterion
set forth in T.D. 85-111.
One of the criteria which must be satisfied for interest
charges to be excluded is a written financing arrangement. NAL
has offered an invoice, a purchase order, and a General Terms and
Conditions statement, which are to be taken together as a whole,
as evidence of their written financing arrangement. The General
Terms and Condition statement sets forth the terms of sale and
states that "interest will accrue on items past due from terms
stated above." None of these documents contains specific
information regarding interest rates or a guide for determining
the interest rate. These documents are similar to those in HRL
545277, which were the D/A invoice and the statement of D/A
interest prepared by the seller and included with the purchase
documentation. In HRL 545277, Customs found that there was no
written financing arrangement because the documentation did not
contain specific information regarding interest rates or a guide
for determining the interest rate. The same is true in this
case. Therefore, as in HRL 545277 , these documents presented
together do not constitute a written financing arrangement as
required by T.D. 85-111. As this requirement of T.D. 85-111 is
not met, it is not necessary to determine whether the remaining
requirements are met. The "interest" payments are to be included
in the transaction value for the imported merchandise.
NAL states that the structure of their transaction with
Koito is similar to the overall financing arrangement, i.e., a
charge account arrangement, found in TAA #43 dated December 17,
1981. TAA #43, issued prior to T.D. 85-111, found that a charge
account arrangement was part of an overall financing arrangement
which was the required standard for excluding interest costs at
that time. Since, the transactions subject to appraisement in
this case occurred after T.D. 85-111 was issued, we do not find
the TAA #43 instructive in this case.
HOLDING:
Based on the evidence presented, the payments at issue are
considered payments to the seller and part of the price actually
paid or payable. In addition, these payments are not provided
for in a written financing agreement as set forth in T.D. 85-111
and the Clarification. Therefore, they are included in the
transaction value for the imported merchandise.
The Office of Regulations and Rulings will take steps to
make this decision available to Customs personnel via the Customs
Rulings Module in ACS and the public via the Diskette
Subscription Service, Freedom of Information Act and other public
access channels 60 days from the date of this decision.
Sincerely,
Acting Director
International Trade Compliance
Division