HQ 0545094 - Application for further review of Protest 2904-92-100157; interest charges; identified separately from the price actually paid or payable; T.D. 85-111. - United States International Trade Commision Rulings

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HQ 545094

April 1, 1993

VAL CO:R:C:V 545094 CRS

CATEGORY: VALUATION

District Director
U.S. Customs Service
Federal Building, Room 198
511 N.W. Broadway
Portland, OR 97209

RE: Application for further review of Protest 2904-92-100157; interest charges; identified separately from the price actually paid or payable; T.D. 85-111.

Dear Sir:

This is in response to your memorandum of August 31, 1992, under cover of which you forwarded Protest number 2904-92-100157 dated August 12, 1992, filed by George S. Bush & Co., Inc. on behalf of the protestant. Protestant's request for confidential treatment pursuant to section 177.8(a)(3), Customs Regulations (19 CFR 177.8(a)(3)) has been granted.

FACTS:

Protestant, the U.S. subsidiary of a Japanese corporation (seller), is an importer of industrial machinery which it buys from its parent. Protestant generally pays intercompany invoices for these purchases within 360 days. In view of this, protestant and seller entered into a financing agreement pursuant to which seller charges protestant interest on the invoiced prices of imported merchandise.

The agreement provides that protestant will pay seller an amount equal to five percent (calculated on a 360 day basis) of the c.i.f. price of the imported merchandise as the financing cost of said merchandise. Invoices will show the total c.i.f. amount, inclusive of interest, from which five percent interest will be deducted in order to arrive at the total net c.i.f. amount. From this figure will be deducted IRS withholding tax of 10 percent, yielding the net invoice value. The net invoice value represents the amount due and payable to the seller.

Amounts for interest expense under the financing agreement are reflected as deferred interest on protestant's books. Copies of protestant's general ledger journal entries relating to the interest expense in question were included as Exhibit D of protestant's submission dated July 24, 1992.

ISSUE:

The issue presented is whether protestant's deductions from invoice price are non-dutiable interest charges under transaction value.

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised in accordance with the provisions of section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a). The preferred method of appraisement is transaction value, defined as "the price actually paid or payable for merchandise when sold for exportation to the United States."

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

[T]he 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.

19 U.S.C. 1401a(b)(4)(A).

In T.D. 85-111, this office set forth the criteria under which interest charges under a financing arrangement entered into by the buyer would be considered not to form part of the customs value of imported merchandise. T.D. 85-111 provided in pertinent part that interest payments, whether or not included in the price actually paid or payable for imported merchandise, are considered not to form part of dutiable value provided:

A. The interest charges are identified separately from the price actually paid or payable for the goods;

B. The financing arrangement in question was made in writing;

C. 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.

See also the Statement of Clarification of T.D. 85-111, 23 Cust. B. & Dec. (July 26, 1989), which provides that bona fide interest payments under T.D. 85-11 are those which are carried on the importer's books in conformity with generally accepted accounting principles (GAAP).

You contend that the interest charges protestant claims are non-dutiable should be considered part of customs value since, as presented on the invoices, they do not comply with the first criterion of T.D. 85-111, viz., that such charges be identified separately identified from the price actually paid or payable.

However, T.D. 85-111 requires simply that charges be distinguished from the price actually paid or payable for imported merchandise. Protestant has distinguished its interest payments, made pursuant to a written financing agreement, from the price actually paid or payable. A sample invoice attached to the instant protest shows a c.i.f. price, inclusive of interest, from which interest of five percent is deducted in order to arrive at a c.i.f. price, net of interest.

Moreover, we note that T.D. 85-111 specifically provides that if the three criteria it sets forth are met, interest payments, "whether or not included in the price actually paid or payable for merchandise, should not be part of the dutiable value." Here, the charges are distinguishable from the price actually paid or payable and there is a written financing agreement. Furthermore, the interest rate does not appear to be excessive, nor is there any indication that the protested merchandise was sold at a price other than that declared as the price actually paid or payable.

In addition, protestant has submitted documentation that confirms that the interest payments made pursuant to the financing agreement with its Japanese parent are indeed bona fide interest payments in conformity with GAAP. Specifically, protestant provided copies of journal entries to its general ledger which show that amounts for the interest payments in question were debited to protestant's deferred interest account.

Accordingly, having met the conditions imposed by T.D. 85- 111 and the clarification of T.D. 85-111, protestant's interest charges are not dutiable, irrespective of whether or not they are included in the price actually paid or payable.

HOLDING:

You are instructed to allow the protest in full. A copy of this decision should be attached to the Form 19 Notice of Action.

Sincerely,

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