HQ 545818 - Interest charges included in the price actually paid or payable; T.D. 85-111 - United States International Trade Commision Rulings

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HQ 545818

June 29, 1995

VAL R:C:V 545818 CRS

CATEGORY: VALUATION

Richard C. Katz, Esq.
Cameron and Hornbostel
230 Park Avenue
New York, NY 10169

RE: Interest charges included in the price actually paid or payable; T.D. 85-111

Dear Mr. Katz:

This is in reply to your letter of October 24, 1994, on behalf of Kash N' Gold, Ltd. (KNG), in which you requested a ruling on the appraised value of telephones and telephone equipment imported from the Peoples Republic of China (the "PRC"). A meeting was held with a member of my staff on December 6, 1994, following which an additional submission was made under cover of a letter dated December 14, 1994. We regret the delay in responding.

FACTS:

KNG, the importer of record, buys telephones and telephone equipment manufactured in the PRC; however, KNG does not buy the imported merchandise directly from the manufacturers but instead from trading companies in Hong Kong and Taiwan. The terms of sale are f.o.b. Hong Kong or Taiwan and payment is made is made by letter of credit or by wire transfer. The imported merchandise is currently appraised under transaction value based on the price reflected on the commercial invoice issued to KNG by the trading companies.

On occasion, however, KNG buys from related parties in Hong Kong and Singapore who, in turn, buy their merchandise from the same Hong Kong and Taiwan trading companies from which KNG normally procures its goods. The purpose of this arrangement is to finance KNG's purchase of the imported merchandise; payment is on open account and is generally made within 120 days. In these situations, KNG pays the trading companies' usual f.o.b. invoice price plus a ten percent mark-up. This amount, described on the commercial invoices as "10% commission/etc. charges," represents the affiliates' compensation for financing the transactions. KNG's Hong Kong and Singapore affiliates, although related to KNG, are not related to the manufacturers of the imported merchandise or to the trading companies.

You contend that imported merchandise purchased from the affiliates should be appraised on the basis of the related parties' f.o.b. price, i.e., that the appraised value of the related party merchandise not include the ten percent finance charge. In support of this you have submitted copies of invoices between a trading company, Galaxy Commutech Ltd., and a party related to KNG, Telemania Enterprises, as well as a copy of an invoice between Telemania and KNG. In addition, you have submitted copies of invoices relating to merchandise ordered by KNG directly from Galaxy.

ISSUE:

The issue presented is whether the finance charge is included in the appraised value of the merchandise purchased from KNG's related parties.

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised in accordance with 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 under the TAA is transaction value, defined as "the price actually paid or payable for the merchandise when sold for exportation to the United States," plus certain enumerated additions. 19 U.S.C. § 1401a(b)(1). However, imported merchandise will be appraised under transaction value only if the buyer and seller are not related, or if related, the circumstances of sale indicate that the relationship did not influence the price actually paid or payable, or the transaction value approximates certain test values. 19 U.S.C. § 1401a(b)(2)(A)-(B). In the instant case, the acceptability of transaction value has not been established with respect to merchandise imported from the related parties. Nevertheless, for purposes of this decision we have assumed that transaction value is the appropriate basis of appraisement.

Interest charges are not considered part of transaction value provided: the interest charges are identified separately from the price actually paid or payable; the financing arrangement was made in writing; the goods being appraised were sold at the price declared as the price actually paid or payable; 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 prevailing rate for such transactions in the country where the financing was provided. T.D. 85-111, 19 Cust. B. & Dec. 258. These conditions apply whether the financing is furnished by the seller, a bank or another natural or legal person. The term "interest," as used in T.D. 85-111 encompasses only bona fide interest charges, and not simply the notion of interest arising out of delayed payment. Statement of Clarification of T.D. 85-111, 54 Fed. Reg. 29,973 (1989). See also C.S.D. 91-10, 25 C.S.D. 285. In order to be considered bona fide interest expense, the payments must have been booked as interest expense on the buyer's books in accordance with generally accepted accounting principles.

In support of your contention that the finance charges should not be included in the appraised value of the merchandise purchased from the related parties, you have submitted copies of invoices from one of the trading companies, Galaxy Commutech Ltd., to one of KNG's related parties, Telemania Enterprises, and a copy of an invoice from Telemania to KNG. In addition, you have submitted copies of invoices in respect of merchandise ordered by KNG directly from Galaxy.

Nevertheless, since you have advised that there exists no written financing agreement between the related parties and that no evidence as been provided to support a determination that the claimed interest rate did not exceed the prevailing rate for similar transactions in the country where the loan was made, it is our position that the conditions of T.D. 85-11, as amended by the Statement of Clarification, have not been met. Accordingly, we have no authority to treat these payments as non-dutiable.

HOLDING:

Accordingly, in conformity with the foregoing, the finance charges paid by KNG to its related parties constitutes part of the price actually paid or payable for the imported merchandise.

Sincerely,

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