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HQ 546070

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April 25, 1996
RR:IT:VA 546070 er

CATEGORY: VALUATION

RE: Dutiability of "Interest" Payments; Application for Further review of Protest (1001-95-102212).

Dear Sir:

This is in response to your memorandum accompanying the unsigned and undated protest (1001-95-102212) and memorandum filed by counsel on behalf of their client, Sigma Corporation of America ("Sigma"). The merchandise consists of lenses. The entries were liquidated on February 17, 1995. No date was provided for the entry of the merchandise. The protest concerns the dutiability of certain "interest" payments made by the importer, Sigma, to various banking institutions. We regret the delay in responding.

FACTS:

Sigma purchases photographic cameras and lenses from its parent company in Japan. According to counsel, effective January 1, 1987, Sigma began financing all purchases though its parent company's banking contacts. Credit terms are 150 days for air shipments and 180 for ocean. Interest charges are identified separately from the CIF amount on the parent company invoices. A representative invoice, confirmation and terms of payment were submitted.

According to counsel, prior to the exportation of the merchandise from Japan, the parent corporations sends, by fax, to the importer an invoice for the goods shipped, with payment terms stated on the invoice. Payment is due 150 days after presentation of the sight draft in the case of goods shipped by air, and 180 days after presentation of the sight draft in the case of goods shipped by sea. The commercial invoice identifies the amount owing for the merchandise and the amount owing for interest. The two amounts are separately identified. Upon exportation of the merchandise, the parent presents export documents to its bank in Japan and is paid the CIF value of the merchandise. Either 150 or 180 days after presentment, as the case may be, the importer remits to its bank an amount for the goods and an amount for the interest. The importer's bank then remits to the parent's bank an amount of money to cover both the purchase of the goods and the interest. The interest payments are kept by the parent's bank and are not remitted, either directly or indirectly, to the seller.

Around July 1995, Customs asked the importer for a copy of its written financing arrangement. The importer represented to Customs that no separate written financing contract existed. Customs advanced the dutiable value of the merchandise by an amount equal to the interest charges. Additionally, you report that the importer was the subject of an audit which revealed that the interest amounts were not identified and booked separately from purchases.

ISSUE:

Whether the amounts characterized as "interest" payments are included in the appraised value of the 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 (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 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 party. 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.

Counsel for the importer challenges Customs' decision to include as part of the transaction value of the imported merchandise, amounts paid by the importer to various banking institutions as interest. According to counsel, Customs' decision was made based on the fact that a written financing agreement did not exist between the parties at the time the protested entries were made. Counsel argues that the principle that a "writing" or a "contract" need not necessarily be construed from a single document has long been recognized by the courts.

It is your position that the interest payments made by the importer to a bank are indirect payments to the seller as they are not part of an overall written financing arrangement. Accordingly, in appraising the merchandise you added the interest amounts to the purchase price of the goods. You reference the subsequent discovery during the course of an audit, that the interest amounts were not identified and booked separately from purchases on the importer's books as additional justification for including the payments in the appraised value.

The discovery that the interest payments are not recorded separately from purchases on the importer's books, alone, is determinative as to the dutiability of the interest payments. T.D. 85-111; Statement of Clarification of T.D. 85-111 and HRL 544580 dated March 1, 1991. Accordingly, Customs has no authority to conclude that the interest charges are bona fide; accordingly, such charges must be regarded as part of the price actually paid or payable for the merchandise. Having concluded that the evidentiary requirements set for in T.D. 85-111 and the Statement of Clarification have not been met, we note that while we disagree with counsel's argument that documents other than an actual written financing agreement may be considered as satisfying the standard in T.D. 85-111, it is unnecessary to address the merits of that argument.

HOLDING:

Because the importer failed to record the interest payments separately from purchases as such in its books, such payments are not bona fide interest payments and, accordingly, comprise part of the appraised value of the imported merchandise. You are directed to deny this protest in full. In accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive, this decision should be mailed by your office to Protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Rulings Module in ACS and the public via the Diskette Subscription Service, Lexis, Freedom of Information Act and other public access channels.

Sincerely,

Acting Director
International Trade

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