HQ 0544340 - Payments for Failure to Purchase the Minumum Quantity of Fabric; 19 U.S.C. 1401a(b)(1); Generra Sportswear Co. v. U.S. - United States International Trade Commision Rulings

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HQ 544340
September 11, 1990

VAL CO:R:C:V 544340 DHS

CATEGORY: VALUATION

Frank J. Desiderio, Esq.
Grunfeld, Desiderio, Lebowitz & Silverman 12 East 49th Street
New York, Ny 10017

RE: Payments for Failure to Purchase the Minumum Quantity of Fabric; 19 U.S.C. 1401a(b)(1); Generra Sportswear Co. v. U.S.

Dear Mr. Desiderio:

This is in response to your letter of May 19, 1989, requesting a ruling regarding the dutiability of payments made by Bernard Chaus, Inc. (hereinafter referred to as the "importer") to an unrelated fabric vendor (hereinafter referred to as the manufacturer). Please accept our apologies for the delay in responding.

FACTS:

You have provided the following facts. The importer purchases fabric to utilize in the production of samples. The manufacturer requires that the importer purchase minimum quantities of fabric (i.e., 600 yards per color on solid fabrics, 3,000 yards per print on screen prints, and 6,000 yards on rotary print fabrics). When the importer does not order the minimum quantity specified, the vendor imposes a charge (e.g., $1,000 or $1,250) which is separately indicated on the fabric invoice. You state that it is unlikely that the importer will ever order the minimum quantity since only 50 to 75 yards are required for the production of samples.

You have stated pursuant to our phone conversation that the charge imposed is always 150,000 yen per style. Since the importer pays the seller in U.S. dollars the amount shown on the invoices may vary based upon the currency conversion rate agreed upon between the parties.

ISSUE:

Whether the importer's payment to the seller for failure to purchase the minimum quantity of fabric is part of the price actually paid or payable.

LAW AND ANALYSIS:

The term "price actually paid or payable" is defined in section 402(b)(4)(A) of the Tariff Act of 1930 as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)(1)): . . . the total payment (whether direct or indirect . . .) made, or to be made for imported merchandise by the buyer to, or for the benefit of, the seller.

Section 152.103(a)(1) of the Customs Regulations (19 CFR 152.103(a)(1)), provides that the "price actually paid or payable":

...will be considered without regard to its method of derivation. It may be the result of discounts, or negotiations, or may be arrived at by the application of a formula, such as the price in effect on the date of export in the London Commodity Market. The word "payable" refers to a situation in which the price has been agreed upon, but actual payment has not been made at the time of importation. . . .

In this case, you contend that the monies paid for failure to order the minimum amount of fabric is not part of the price actually paid or payable for the imported fabric, but rather is in the nature of a penalty for goods not imported.

Our review of the facts presented indicates that since there is little likelihood that the minimum quantities will be purchased, the total payment for the imported merchandise will usually include the surcharge. Accordingly, this amount is part of the price actually paid or payable. See, Generra Sportswear Co. v. U.S., Slip Op. 89-1652, dated May 22, 1990.

Headquarters decisions consistent with this position include Headquarters Ruling Letter (HRL) 543445, dated October 23, 1985 and HRL 544205, dated December 12, 1988.

In HRL 543445, the parties agreed to a "base selling price" plus additional compensation in the event that a minimum number of gasoline engines were not purchased. We held that the agreement essentially provided that the final unit price for the engines purchased during a model year would not be known until the number of engines actually purchased during the year was known. Therefore, we concluded that there was a direct relationship between the additional compensation and the engines that were purchased and imported, and were part of the price actually paid or payable for the engines. The amount paid was to be apportioned over the number of engines actually imported in the relevant model year.

In HRL 544205, dated December 12, 1988, a similar scenario as HRL 543445 was presented. In that case, the price schedule provided for a price reduction as the quantity purchased increased. The contract language specifically provided for a cpurchase price adjustment if the minimum number of engines was not purchased. We concluded that the entire payment was the price actually paid for the engines purchased for the model year.

You cite HRL 543295, dated January 15, 1985, in support of your position. In that ruling letter, the ultimate purchaser paid the seller an amount for lost contributions due to the unanticipated reduced volume of purchases below the minimum quantities specified in the contract. We concluded that even if the payment was made by the buyer to the seller, that this amount would not form part of the price actually paid for the imported merchandise for the reason that this payment was made to compensate the parent company for merchandise which was contracted for but not imported. Further, the documentation furnished in HRL 543295 clearly established that the additional contributions provided the seller were made on the basis of a settlement agreement, a document completely separate from the purchase order. Additionally, no evidence existed which indicated that the parties intended this arrangement at the time of purchase.

It is our opinion that the payment in question is paid as part of the price actually paid or payable for the imported merchandise. This is to be distinguished from a penalty charge which is independent of the price actually paid or payable for the the imported merchandise.

Accordingly, the "price actually paid or payable" for the imported fabric would include the payment to the seller for the failure to purchase the minimum quantity of fabric.

HOLDING:

The payment to the seller for the failure to purchase the minimum quantity of fabric is part of price actually paid or payable for the imported merchandise.

Sincerely,

John Durant, Director

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