VAL CO:R:C:V 544615 DPS
District Director
U.S. Customs Service
Portland, Oregon
RE: Request for Internal Advice 73/90; post-entry payments
to suppliers; assists; part of price actually paid or
payable
Dear Sir:
This is in response to your request for internal advice
received by our office on January 23, 1991, concerning
treatment of certain supplemental payments made by the
importer, Avia International Group, Inc. ("Avia" or the
"Company"), to the manufacturer, when the importer fails to
purchase a minimum quantity of any given style of footwear.
Counsel for Avia initiated this internal advice request in a
submission dated September 24, 1990, to the District
Director, Portland, Oregon. Subsequently, after
Headquarters' review of all submissions relevant to the case,
a meeting was held with Headquarters personnel on April 16,
1991, at which Avia's counsel presented further explanation
and arguments in support of the importer's position.
FACTS:
Avia's counsel presents the following facts. When the
Company negotiates for production of footwear it assumes that
a minimum quantity, usually 100,000 pair, will be purchased.
If these quantities are not purchased, the Company will
negotiate a payment with a seller to reimburse it for
production and related costs which it was not able to recover
because the anticipated level of production was not achieved.
Negotiations as to amount and payment take place after
production of the particular footwear has been completed and
after it has been imported. The principal part of these
payments represent unamortized mold costs. From time to
time, however, the payments include reimbursement for unused
materials and components, cutting dies and lasts.
What counsel did not specify in the written submission,
which was later clarified in the meeting with OR&R attorneys,
is that the arrangement that Avia will negotiate a payment
with a manufacturer to reimburse it for production and
related costs which it was not able to recover because of
lower than anticipated levels of production is made between
the parties prior to production and importation to the U.S.
The only matter requiring negotiations between the parties
after production and importation is the amount of
reimbursement, if any.
Counsel states that in the past, the Company has treated
payments for molds, unused materials and components, cutting
dies and lasts, as assists. Counsel indicates that Avia
reported these payments as assists and paid duty on them.
Counsel has since advised Avia that these payments are not
considered assists, and further argues in this request for
internal advice, that the subject payments are not part of
the price actually paid or payable for the imported
merchandise.
ISSUE:
(1) Whether the subject payments made to manufacturers
by importer as reimbursement for costs not recovered because
of importer's failure to order requisite number of units in
accordance with agreement between manufacturer/seller and
importer constitute assists.
(2) Whether the subject payments made to manufacturers
by importer as reimbursement for costs not recovered because
of importer's failure to order requisite number of units in
accordance with agreement between manufacturer/seller and
importer, are considered part of the price actually paid or
payable for the imported merchandise, either as a formula or
otherwise.
LAW & ANALYSIS:
Transaction value, the preferred method of appraisement
is defined in section 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 five enumerated statutory additions.
The term "price actually paid or payable" means the
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 from the country of exportation to
the place of importation in the United States)
made, or to be made, for imported merchandise by
the buyer to, or for the benefit of, the seller.
402(b)(4)(A) of the Tariff Act of 1930 as amended by the
TAA. One of the statutory additions is "the value,
apportioned as appropriate, of any assist...." The term
"assist" is defined in section 402(h) of the TAA as follows:
any of the following if supplied directly or
indirectly, 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 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, artwork, design
work, and plans and sketches that are
undertaken elsewhere than in the United States
and are necessary for the production of the
imported merchandise.
Here, the importer/buyer does not supply directly or
indirectly any of the items enumerated above to the
manufacturer/seller. Avia only agrees to cover certain costs
of production should its' order fall short of the requisite
number of units. Accordingly, the subject payments should
not be considered assists.
The issue still remains whether the payments by Avia to
the manufacturer are part of the price paid or payable for
the subject merchandise. Counsel argues that these payments
are not part of the price paid or payable for the following
reasons. First, at the time the footwear is imported, the
Company's only obligation is to pay the purchase price.
Compensation to the seller for unrecovered costs is agreed to
only after importation and only after the Company decides not
to place production orders for the footwear in the quantity
anticipated. Second, counsel argues, even if the payments
can be fairly characterized as price increases, the fact that
they occur post-entry precludes their being considered
dutiable.
In support of the first contention, that these payments
are not part of the price, counsel acknowledges awareness of
the fact that no Headquarters Ruling Letters (HRL) exist that
are directly on point in support of the importer's position.
The rulings cited by counsel on the issue of the payments
between buyer and seller being part of the price actually
paid or payable, HRL 543924 (May 29, 1987), HRL 543770
(February 10, 1987) and HRL 543882 (March 13, 1987) are
distinguishable from this situation because here, importer
and seller agreed at the outset of their transaction, prior
to any production or importation, to negotiate reimbursement
for molds, cutting dies and lasts, and unused materials and
components, if Avia did not order the required number of
shoes from manufacturer.
In HRL 543924, the situation addressed the importer
requesting termination of production after 8,000 units of the
10,000 ordered had been manufactured. The manufacturer was
left with excess fabric that it sold at a loss. No prior
agreement between buyer and seller addressing this
contingency existed. The monies paid by the buyer to make up
the loss in the sale of the excess fabric were, in effect,
cancellation payments, not part of the price actually paid or
payable for the imported merchandise.
HRL 543770 involved payments made for cancellation of
purchase orders made by an importer to a foreign
manufacturer. Such payments are distinct from those involved
in the instant case. HRL 543770 cited HRL 543445, dated
October 23, 1985, a case quite similar to the Avia case,
wherein the agreement between the parties provided that if
the importer failed to purchase a specified minimum quantity,
the importer paid the manufacturer an added compensation.
This added compensation was considered to be part of the
price actually paid or payable for the imported merchandise.
HRL 543882 involved the development of special tooling
and the ultimate U.S. purchaser's contribution toward the
tooling expenses in the form of payments made to the foreign
manufacturer, through the U.S. subsidiary. In the same
transaction, the U.S. purchaser agreed to compensate the
seller, through the U.S. subsidiary for the foreign seller's
reservation of capacity and its investments necessary to meet
the planned requirements of the ultimate purchaser. The
holding in the case was that the costs for reserving capacity
and preparing for production are not part of the price
actually paid or payable. However, in the same ruling, HRL
543882, the holding in HRL 543574, dated March 24, 1986, a
reconsideration of HRL 543293, dated January 15, 1985, is
recognized. In HRL 543574, Customs concluded that the
payments made by the ultimate purchaser, through the
importer, to the foreign seller for tooling are "indirect
payments" made or to be made, by the buyer to the seller.
As such, these payments were determined to be part of the
"price actually paid or payable" for the imported
merchandise.
The situation presented here is similar to that
addressed in HRL 543983, dated November 2, 1987. There, the
U.S. buyer and foreign seller entered into a purchase
contract. In addition the buyer advanced monies to the
seller for the purchase/manufacture of the mold necessary to
produce the product. Half of the amount advanced for the
mold was to be returned to the buyer upon the completion of a
certain number of units and the remainder was to be remitted
to the buyer after completion of an additional number of
units. The seller returned a part of the payment when
certain quantities of the merchandise were purchased. We
concluded that the amount given to the seller originally for
the mold did not constitute an assist but was part of the
"price actually paid or payable" for the imported
merchandise.
Here, the importer has an agreement with the
manufacturer to reimburse it for certain costs if importer
fails to order the requisite number of units. The parties
agree that they will negotiate the amount of reimbursement
after production and importation. In accordance with the
rulings described above, C.S.D. 83-3, which held that
payments by the buyer to the manufacturer for producing tools
necessary for producing the imported merchandise, constitute
part of the price actually paid or payable, and Generra
Sportswear Company v. United States, 905 F.2d 377 (Fed. Cir.
1990), the payments for mold costs by Avia to the
manufacturer/seller should be included as part of the price
actually paid or payable for the imported merchandise.
The next line of argument presented by Avia's counsel
focuses on the timing of the payments. Counsel argues that
even if the importer conceded that the payments at issue here
are price adjustments, they are not dutiable because they
arise only after importation. The facts are that Avia and
manufacturer agree to negotiate reimbursement for certain
costs should Avia fail to order the requisite number of
shoes. This agreement, in the form of an informal business
arrangement, is made prior to production and importation.
Only after production and importation, can the negotiations
for the subject reimbursement payments begin, because only
then can it be determined whether the requisite number of
shoes have been ordered and imported. The arrangement is
akin to a formula but does not satisfy the requirements of a
formula as set forth in HRL 544364, dated October 9, 1990.
Nevertheless, we disagree with the alternative argument
advanced by counsel for the importer that the additional
payments must be disregarded since it represents a change in
the price which was arrived at after the merchandise was
imported.
The facts indicate that buyer will pay a certain price
per unit imported, plus an amount to cover mold and other
production costs, if buyer fails to order and purchase the
requisite number of shoes. The fact that the reimbursement
physically occurs after production and importation does not
preclude them from being included in the price actually paid
or payable since the understanding between the parties from
the outset of the transaction was clear.
HOLDING:
Avia's payments to the manufacturer/seller for mold
costs and cutting dies and lasts are considered to be part of
the price actually paid or payable for the imported
merchandise. The fact that these payments occur post-
importation does not preclude their being considered part of
transaction value because the parties agreed at the outset of
the transaction, prior to production, that reimbursement
would occur if the required number of shoes were not ordered
and imported.
Sincerely,
John Durant, Director
Commercial Rulings Division