HQ 0544638 - Effect of contributions to brand marketing expenses by manufacturer and importer of vodka on appraised value - United States International Trade Commision Rulings

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HQ 544638

July 1, 1991

VAL CO:R:C:V 544638 DPS

CATEGORY: VALUATION

John B. Pellegrini, Esq.
Ross & Hardies
529 Fifth Avenue
New York, New York 10017-4608

RE: Effect of contributions to brand marketing expenses by manufacturer and importer of vodka on appraised value

Dear Mr. Pellegrini:

This is in response to your letter of January 23, 1991, requesting a ruling on behalf of Joseph E. Seagram & Sons, Inc. ("Seagram" or the "importer"), concerning the proper appraised value of vodka it plans to import.

FACTS:

The subject vodka is distilled in Poland and is purchased from an unrelated vendor, Agros Foreign Trade Enterprise ("Agros"). The Company has been importing vodka from Agros since late 1989. The vodka is duty-free under the Generalized System of Preferences. Counsel states that by letter dated October 1, 1990 to the District Director at Detroit, Michigan, the company described its arrangement to develop, execute and share costs of a U.S. marketing plan with Agros. Seagram asserted that the arrangement did not affect the appraised vodka. Counsel states that the letter to Customs in Detroit also disclosed certain assists, requested permission to report assists annually under Section 141.86(a)(11) of the Customs Regulations, and requested that the District Director seek internal advice in the event of any disagreement on the issues addressed in the letter. The District Director granted Seagram permission to report assists annually. However, according to counsel, the District Director declined to seek internal advice and asked that seagram seek a ruling on the other appraisement issues.

The terms under which the subject vodka is purchased are set forth in an agreement dated November 3, 1988 between Seagram and Agros (the "Agreement"). The agreement is supplemented by a royalty free trademark license executed in favor of the Company on September 20, 1989, and a letter of January 23, 1989 concerning development of new packaging.

Paragraph 12(b) of the Agreement requires that Seagram develop and execute a marketing plan for the subject vodka. The Agreement requires that the Company and Agros each make minimum payments for brand marketing purposes each calendar year. Brand marketing includes advertising, merchandising, promotion, market research, public relations, testing and similar brand building activities. It also includes packaging changes. The brand marketing expenditure requirements are tied to volume and decrease on a per-case basis as volume increases. The Agreement requires that Seagram make the expenditures and that Agros reimburse a specified portion thereof. The Agros reimbursement is made in the year following Seagram's expenditure.

Counsel asserts its view that neither Seagram's brand marketing expenditures nor the reimbursement by Agros affects the appraised value of the imported vodka, except to the extent that the Seagram's contribution relates to packaging changes which may be characterized as assists. Counsel further states that transaction value is the correct basis of appraisement, and that Seagram contributions to brand marketing cannot be deemed part of the price actually paid or payable for the imported merchandise since they are neither paid to, or for the benefit of, the seller. In support of this position, counsel argues:

The term, for the benefit of the seller, means no more than that the buyer makes a payment to a party other than the seller but to satisfy an obligation of the seller. It does not cover payments made by the buyer from which the seller could indirectly benefit because they increase sales of the imported product, e.g. advertising the product in the United States. Moreover, the brand marketing expenditures have no relation to the production or the exportation of the imported merchandise and as such are not made for the imported merchandise. See Generra Sportswear Company v. United States, 905 F.2d 377 (Fed. Cir. 1990).

The only manner in which the contributions to brand marketing expenditure by Agros could affect appraised value, counsel argues, is if they are deemed to be a refund or rebate of the price actually paid or payable. Counsel further states that since these contributions are made in the calendar year following importation, they may not reduce appraised value.

ISSUES:

(1) Whether amounts paid by importer and foreign vendor of Polish vodka pursuant to an agreement between them to share extensive U.S. marketing costs, the amounts of which are determined by the volume of product imported into and sold in the U.S. annually, and tied to the underlying sale of the subject polish vodka by the importer in the U.S., are part of the price actually paid or payable for the imported merchandise under transaction value; and

(2) If not, whether the contributions to marketing expenses meet the criteria to be considered one of the statutory additions to transaction value.

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. The five enumerated statutory additions to transaction value set forth in 402(b)(1) of the Tariff Act of 1930, as amended by the TAA are as follows:

(A) the packing costs incurred by the buyer with respect to the imported merchandise;

(B) any selling commission incurred by the buyer with respect to the imported merchandise;

(C) the value, apportioned as appropriate, of any assist;

(D) any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States; and

(E) the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrue, directly or indirectly, to the seller.

Consistent with transaction value, we would add to the price actually paid or payable any of the items set forth above that are deemed to apply to the transaction.

An item is either part of the price actually paid or payable, or it is not. In this regard, 152.103(a)(2), Customs Regulations (19 CFR 152.103(A)(2)), provides in pertinent part:

Activities such as advertising, undertaken by the buyer on his own account, other than those for which an adjustment is provided in section 152.103(b), will not be considered an indirect payment to the seller though they may benefit the seller. The costs of those activities will not be added to the price actually paid or payable in determining the customs value of the imported merchandise.

Based on the regulation cited above, no legal authority exists to treat these advertising expenses as part of the "price actually paid or payable" for the imported merchandise, provided such expenditures are, in fact, for advertising and marketing.

With regard to expenses relating to packaging of the imported merchandise, such expenditures clearly fall within one of the statutory additions to transaction value set forth in 402(b)(1)(A) (packing costs incurred by the buyer) and/or 402(b)(1)(C) (cost of assists) of the Tariff Act of 1930, as amended by the TAA. Accordingly, these costs should be added to the price actually paid or payable for the imported vodka. With regard to Seagram's arrangement with Customs in Detroit to declare assists annually, we have no comment. We only assume that all assists and packaging costs will be declared in accordance with all applicable regulations.

HOLDING:

Pursuant to the information presented, and assuming its accuracy, payments for brand marketing purposes, excluding any costs associated with packaging the subject vodka, to be paid by Seagram, the importer, and Agros, the exporter, it is our conclusion that other than those items which are part of the "price actually paid or payable," no statutory authority exists to add such brand marketing payments to the price actually paid or payable for the merchandise.

All costs related to packaging the imported merchandise should be considered packaging costs under 402(b)(1)(A) or assists under 402(b)(1)(C) as appropriate, and added to the price actually paid or payable for the subject merchandise.

Sincerely,

John Durant, Director

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