HQ 0544615 - Request for Internal Advice 73/90; post-entry payments to suppliers; assists; part of price actually paid or payable - United States International Trade Commision Rulings

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HQ 544615

September 11, 1991

VAL CO:R:C:V 544615 DPS

CATEGORY: VALUATION

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

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