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HQ 544425

February 23, 1990

CLA-2 CO:R:C:V 544425 VLB

CATEGORY: VALUATION

--- Seventh Avenue
New York, New York 10018

RE: Request for Prospective Ruling Dated November 27, 1989

This is in response to your letter dated November 27, 1989, requesting a ruling on a proposed arrangement between one of your ladies apparel clients (hereinafter referred to as "your client") and a major retail chain (hereinafter referred to as the "retail purchaser").

FACTS:

You state that your client is proposing to engage in a transaction wherein it will take orders from a retail purchaser and subsequently channel the orders to a manufacturer in an unspecified non-quota foreign country (hereinafter referred to as the "manufacturer"). In order to obtain your client's product line at special reduced prices, the retail purchaser will fund the purchase by issuing its own letter of credit for payment directly to the manufacturer. In addition, the retail purchaser will be the importer of record and will pay all charges in connection with the importation, e.g., manufacturer's invoice price for the garments, freight, duties, clearance and delivery charges.

You have provided the following example of the transaction:

1. Manufacturer offers your client a sweater at $10.00 F.O.B.

2. Your client offers the same sweater to the retail purchaser at $11.00 F.O.B.

3. Provided the retail purchaser issues the letter of credit to the manufacturer and lands the sweater directly.

4. The retail purchaser will pay duty, not on $10.00 F.O.B., but on $11.00 F.O.B.

5. The manufacturer will hold the $1.00 profit to your client's credit [due to currency restrictions].

6. Your client does not wish to reveal to the retail purchaser the amount of profit. The retail purchaser understands this and is willing to pay the additional duty, whatever it is.

You further state that your client has additional on-going business with the manufacturer. Therefore, the extra $1.00 that the retail purchaser has paid to the manufacturer is held as a credit that is applied toward your client's subsequent purchases. You provide the following example of this proposed transaction:

1. Your client has $1.00 credit with the manufacturer.

2. Your client orders a different sweater that has a $10.25 F.O.B. value.

3. The manufacturer requests that your client issue a letter of credit for only $9.25 F.O.B.

4. The manufacturer issues a Customs invoice for $10.25 F.O.B. and your client pays the duty on this value.

5. The entire transaction reflecting the $1.00 discount will be clearly explained on the commercial invoice or by a statement accompanying it at the time of entry.

6. Your client through the letter of credit payment remits $9.25 to the manufacturer, offsetting its credit.

ISSUE:

Whether the described transactions are in conformance with Customs rules and regulations.

LAW AND ANALYSIS:

The preferred method of appraising merchandise is transaction value, 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 the merchandise when sold for exportation to the United States, plus certain enumerated additions.

The "price actually paid or payable" is defined in section 402(b)(4)(A) of the TAA as:

The total payment (whether direct or indirect . . .") made, for imported merchandise by the buyer to, or for the benefit of, the seller.

In this case it appears that transaction value is the proper appraisement method. (In making this determination, we are assuming that all of the parties are unrelated). There is a sale for exportation to the U.S. between your client and the retail purchaser. It is the price involved in this sale that you state will be declared as the price actually paid or payable for the merchandise. Under the TAA, this is an acceptable value for the price actually paid or payable.

In the second transaction, your client pays the manufacturer by issuing a letter of credit that is less than the total F.O.B price of the goods. The remaining amount ($1.00) is offset against your client's credit with the manufacturer. As stated above, the price actually paid or payable for imported merchandise is the total payment, whether direct or indirect by the buyer to the seller.

In this case the total payment that your client is making to the manufacturer is $10.25 F.O.B. $9.25 of this amount is a direct payment through the letter of credit. The remaining $1.00 is an indirect payment to the manufacturer. Therefore, the full amount ($10.25) is the correct amount for the price actually paid or payable. The full amount is the amount that you are proposing to declare to Customs and to explain on the commercial invoice. Therefore, this is an acceptable calculation of the price actually paid or payable.

Of course, if a visa is required to obtain entry of the imported merchandise, then release of the merchandise would depend upon presentation of all relevant documentation in accordance with Treasury Decision 86-56. A copy of T.D. 86-56 is provided for your convenience.

HOLDING:

The proposed transactions are acceptable for transaction value purposes.

Sincerely,

John Durant, Director
Commercial Rulings Division

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