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HQ 544395


November 23, 1990

VAL CO:R:C:V 544395 ML

CATEGORY: VALUATION

Regional Director
Regulatory Audit Division
New York, New York 10048

RE: Request for Reconsideration of C.S.D. 88-34, Dated September 8, 1988; Mori-Lee Associates

Dear Sir:

This is in reply to a memorandum, dated June 8, 1990, (AUD- 8-O:R JCS), from your office referencing letter dated August 29,1989, requesting the reconsideration of C.S.D. 88-34, regarding deductions made for financing fees by Mori Lee Associates (CLA-2 CO:R:C:V 544082 EK).

FACTS:

Mori-Lee Associates (hereinafter referred to as the "importer") purchases formal wear from an unrelated and a related manufacturer. The importer deducts from entered value an amount allegedly incurred in Taiwan by the foreign manufacturers for finance or capital acquisition. For the unrelated manufacturer, a constant 8% of the imported material costs are added to the FOB invoice price for the merchandise. The related Taiwanese manufacturer has a 5% addition for the merchandise. The importer states that he is unaware of the actual finance costs incurred by the two manufacturers. Additionally, the auditors have informed us that the importer makes "advance payments" to both Taiwanese manufacturers. The auditors have not, however, provided any detailed descriptions as to the nature of these advance payments (i.e., whether they are in the nature of cash, or perhaps materials furnished to the manufacturers, resulting from cash payments made by the importer to a third party). This fact was not set forth in the original protest decision published as C.S.D. 88-34. The auditors do state, that these advance payments provide "working capital" for the manufacturers for which the importer receives no interest income.

The relevant portion of C.S.D. 88-34 about which you ask for reconsideration, holds that payments made by the buyer for the interest charges are not part of the "price actually paid or payable." Your audit revealed that the importer did not record the "financing fees" as interest expense within the firm's internal accounting records in conformance with generally accepted accounting principles. You believe that "financing fees" should only be considered nondutiable if it can be proven that they were actually incurred by the foreign manufacturer, and calculated on some appropriate and reasonable basis.

ISSUE:

Whether the "financing fee" charged by the manufacturer to the importer is includable in the "price actually paid or payable" for imported merchandise, when the fee is not recorded as interest expense in accordance with generally accepted accounting principles.

LAW AND ANALYSIS:

The preferred method 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 the merchandise when sold for exportation to the United States", plus certain enumerated additions. Treasury Decision (T.D.) 85-111 dated July 17, 1985, addressed the issue of the dutiability of the interest charges paid by the importer. Customs stated that interest payments, whether or not included in the "price actually paid or payable" for imported merchandise, should not be considered part of dutiable value provided the following criteria are satisfied:

(1) The interest charges are identified separately from the price actually paid or payable;

(2) The financing arrangement in question was made in writing;

(3) Where required by Customs, the buyer can demonstrate that

- the goods undergoing appraisement 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 transaction prevailing in the country where, and at the time, when the financing was provided.

Customs issued a statement of clarification regarding the treatment of interest charges in the value of imported merchandise in C.S.D. 89-70 which became effective October 17, 1989. While the changes made by C.S.D. 89-70 have no retroactive effect, Customs therein, interpreted the term "interest" to encompass only bona fide interest charges, not simply the notion of interest arising out of a delayed payment. 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 (emphasis added). C.S.D. 89-70 further stated that the buyer must be able to prove that the "price actually paid or payable" for identical or similar goods sold without a financing arrangement closely approximates the "price paid or payable" for the goods being appraised. If the buyer fails to meet this test, no authority exists for distinguishing the alleged interest payments from the "price actually paid or payable" for the merchandise.

In the instant case, the importer has often supplied the manufacturers with advance payments and financing fees. It is unclear as to whether the financing fees have any direct correlation to the actual "cost of capital" in Taiwan since "capital" had previously been supplied in the form of the cash advances. Further negating the nondutiability of these interest expense deductions is the fact that the internal accounting records of the importer do not record the "financing fees" as interest expenses. Under these circumstances, we have no authority to make an adjustment to the "price actually paid or payable."

The second issue involves advance payments supplied to the manufacturers for "working capital". In the instant case, advance payments (cash) are a dutiable part of the "price actually paid or payable" for the merchandise when they are in the form of cash advances.

If the money is advanced to a third party and materials are purchased, which are later supplied to the manufacturer free of charge, the furnishing of this material would be considered an assist. The term "assist" is defined 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 sale for export to the United States of the merchandise:

(i) Materials, components, parts, and similar items incorporated in the imported merchandise....

If the importer has sent money abroad to purchase materials to be furnished to the manufacturer of subsequently imported merchandise, the materials supplied will be a dutiable addition to the "price actually paid or payable" for the merchandise. Please note, that the value of any assist will include transportation costs to the place of production. See, Section 152.103(d), Customs Regulations (19 CFR 152.103(d)).

HOLDING:

In view of the foregoing, no authority exists to deduct the claimed financing fees from the "price actually paid or payable" for the imported merchandise. In light of the statement of clarification, C.S.D. 89-70, it is not necessary to reverse C.S.D. 88-34, CLA-2 544082 EK. Please note, however, that C.S.D. 88-70 has no retroactive effect and will not impact on those entries filed prior to October 17, 1989. Only entries made after October 17, 1989 are subject to the changes bade by C.S.D. 89-70.

Furthermore, to the extent that any monetary advances are made to the manufacturers in connection with the imported merchandise, they are dutiable as part of the "price actually paid or payable". Should these advances be made to a third party and result in the acquisition of materials subsequently furnished to the manufacturer in connection with the imported merchandise, this type of advance would be an addition to the "price actually paid or payable" for the imported merchandise, under authority of section 402(b)(1)(c) of the TAA.

Sincerely,

John Durant, Director
Commercial Rulings Division

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