HQ 545984 - Interest charges; transaction value; T.D. 85-111 - United States International Trade Commision Rulings

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HQ 545984

May 16, 1995

VAL R:C:V 545984 CRS

CATEGORY: VALUATION

District Director
U.S. Customs Service
300 South Ferry Street
Room 1001
Terminal Island, CA 90731

RE: Interest charges; transaction value; T.D. 85-111

Dear Sir:

This is in reply to your memorandum of August 17, 1994, to the Assistant Commissioner, Commercial Operations, resubmitted to this office via facsimile on May 1, 1995, under cover of which you requested internal advice in respect of the dutiability of certain interest charges.

FACTS:

Chatani Enterprises, Inc. (the "buyer"), is a subsidiary of T. Chatani & Co., Ltd. (the "seller"), from which it purchases automobile tires on a c.i.f. basis. In addition to packing, insurance and freight costs, the price of the imported merchandise included an amount for interest. The charges reflect an informal agreement between the buyer and seller whereby the seller arranged for a bank to finance the buyer's imports. Based on the information presented, the total payment for the imported merchandise, including the interest charge, was made directly to the bank. The bank apparently did not remit any portion of the interest to the seller, but retained these amounts as compensation for a letter of credit facility extended to the buyer. Since the arrangement was informal, there was no written agreement between the buyer and seller; moreover, the buyer did not record the interest amounts on its books as interest expense in accordance with generally accepted accounting principles.

ISSUE:

The issue presented is whether certain interest charges which were not carried on the buyer's books as bona fide interest expense in accordance with generally accepted accounting principles are included in the transaction value of imported merchandise.

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 (the "TAA"; 19 U.S.C. § 1401a). The preferred basis 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 amounts equal to certain enumerated additions. The term "price actually paid or payable" is defined as "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. 19 U.S.C. § 1401a(b)(4)(A). See also, Generra Sportswear Co. v. United States, 905 F.2d 377, 380 (1990). Nevertheless, transaction value will be the basis of appraisement only if, inter alia, the buyer and seller are not related, or if related, the relationship does not affect the price actually paid or payable. 19 U.S.C. § 1401a(2)(A)-(B)). For purposes of this ruling, we have assumed that transaction value is the appropriate basis of appraisement.

Interest charges included in the price actually paid or payable by the buyer for imported merchandise are not considered part of dutiable value provided: (1) the interest charges are identified separately from the price actually paid or payable for the goods; (2) the financing arrangement in question was made in writing; and (3) 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 transactions prevailing in the country where and when the financing was provided. These conditions apply whether the financing is furnished by the seller, a bank or another natural or legal person. T.D. 85-111, 19 C.S.D. 258, 259. However, for purposes of T.D. 85-111, the term "interest" 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 the instant case, the interest charges were included in the price actually paid or payable and there was no written financing agreement. Moreover, the buyer did not book the interest charges as interest expense in accordance with generally accepted accounting principles. Accordingly, the subject interest charges are included in transaction value as part of the price actually paid or payable.

HOLDING:

The interest charges in question are included in the transaction value of the imported merchandise.

The Office of Regulations and Rulings will take steps to make this decision available to Customs personnel via the Customs Rulings Module in ACS, and to the public via the Diskette Subscriptions Service, the Freedom of Information Act and other public access channels.

Sincerely,

John Durant, Director

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