HQ 546349 - Application for Further Review of Protest Number 1001-96-100720 concerning dutiability of interest charges - United States International Trade Commision Rulings

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HQ 546349

May 10, 1996

RR:IT:VA 546349 RSD

CATEGORY : VALUATION

Port Director
United States Customs Service
JFK Airport
Jamaica, New York 11430

RE: Application for Further Review of Protest Number 1001-96-100720 concerning dutiability of interest charges

Dear Sir:

This is in response to your memorandum dated April 12, 1996, forwarding the application for further review in the above referenced protest; filed on behalf of Toyo Ink America, Inc. (hereinafter Toyo) regarding the appraisement of crude pigment.

FACTS:

Toyo purchased the merchandise from Toyo Ink MFG, Co., Ltd. of Japan, (hereinafter Toyo Ink) and imported it into the United States by making three entries, which are the subject of this protest, at John F. Kennedy Airport on July 10, 1995. Toyo Ink's invoices submitted with the entries provide a description of each item purchased, indicate the quantity of each of the products purchased, the unit C.I.F. prices, and calculate the amount of money owed in U.S. dollars for each of the products purchased. The total quantity and costs of all merchandise purchased on the invoices are also tabulated. Ocean freight, insurance, and interest charges are deducted from the total cost of all the merchandise to arrive at an "FOB VALUE". The invoices show that the payment terms were 120 days after B/L date. The interest rate indicated is 4 percent. Apparently, the interest rate was determined based a one percent charge per month times the 4 months that Toyo Inc. afforded Toyo to pay for the goods. The protestant reports that in other cases the interest rate was 2.7 percent per month which figured to a total interest charge of 8.1 percent for the 4 months.

In appraising the imported merchandise, your office included the interest payments as part of the transaction value. Protestant contends that the interest payments are non-dutiable and should not be included in the transaction value. Although the protest file does not contain a separate written agreement detailing financial arrangements, a provision regarding price in the "Contract of General Terms and Condition of Business" between the parties mentions interest expenses. This provision states that "Prices are to be quoted in U.S. dollars on the basis of C.I.F. New York or other any other U.S.; Port including interest expense of rate 1% per month on the price unless other specified. In case of wide fluctuation in interest rate, this rate could be changed by mutual agreement." Your office attempted to find out how interest payments are carried on Toyo's books by sending a request for information, Customs Form 28 (CF 28), to Toyo. In response to the CF 28, Toyo stated that "We record the CIF price of the goods purchased, which includes interest as a purchase of inventory on our books."

ISSUE:

Whether the amounts designated as interest charges on the seller's invoices are part of the price actually paid or payable for the imported merchandise?

LAW AND ANALYSIS:

As you are aware, the preferred method of appraising merchandise imported into the United States is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a. Section 402(b)(1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the "price actually paid or payable for the merchandise when sold for exportation to the United States" plus enumerated statutory additions. It appears that the parties may be related, and pursuant to ?402(b)(2)(B) of the TAA, transaction value is acceptable only if an examination of the circumstances of the sale indicates that the relationship between Toyo and Toyo Ink did not influence the price actually paid or payable or if the transaction value of the imported merchandise approximates the transaction value of identical or similar merchandise in sale to unrelated buyer in the U.S. or the deductive or computed value for identical or similar merchandise. Although we have assumed for purposes of this ruling that transaction value is the appropriate basis of appraisement, no evidence has been provided to justify its use.

The term price actually paid or payable is defined in

... 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...) made, or to be made for the imported merchandise by the buyer to or for the benefit of, the seller.

This case concerns whether amounts referred to on the commercial invoice as interest should be included in the transaction value of the imported merchandise. Treasury Decision (T.D.) 85-111, dated July 17, 1985, addressed the issue of the dutiability of the interest charges paid by the importer. In T.D. 85-111 Customs indicated that interest payments, whether or not included in the price actually paid or payable for imported merchandise, should be not considered part of appraised value provided the following criteria are satisfied:

1. the interest charges are identified separately from the price actually paid or payable;

2. the financing arrangement in question is made in writing;

3. when 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.

On July 17, 1989, Customs published a Statement of Clarification regarding T.D. 85-111 (54 FR 29973) in which we stated that for the purposes of T.D. 85-111, the term "interest encompasses only bona fide interest charges, not simply the notion of interest arising out of delayed payment." Customs added that "bona fide interest charges are those payments that are carried on the importer's books as interest expenses in conformance with generally accepted accounting principles." This clarification became effective October 16, 1989. See also, C.S.D. 91-10 which applied the Statement of Clarification for T.D. 85-111.

In this case, the seller's invoices denote separate interest charges. The terms regarding interest are specified in a written agreement in the provision related to the price of the goods. It provides for "interest expense of rate 1% per month on the prices. This language suggests that these alleged "interest charges" may not be "bona fide" interest for financing the purchase of the goods, but a fee for a delayed payment. Accordingly, the other factors outlined in T.D. 85-111 and the subsequent clarification need to be carefully scrutinized to determine whether the amounts labeled as interest are in fact consistent with "bona fide" interest charges.

In HRL 545094, April 1, 1993, pursuant to a written agreement the buyer was to pay the seller five percent of the C.I.F. price of the imported merchandise as the financing cost of the merchandise. A sample invoice showed a C.I.F. price, inclusive of interest from which interest of five percent was deducted in order to arrive at a C.I.F. price, net of interest. In concluding that these charges were non-dutiable as interest expenses, we noted that the charges were distinguishable from the price actually paid or payable and there was a written financing agreement. To confirm that these payments were indeed "bona fide" interest payments, the importer provided copies of journal entries to its general leger which showed the amounts for the interest payments in question were debited to protestant's deferred interest account. Based on this evidence, it was determined that the interest charges were not dutiable. Crucial to the finding that the alleged interest charges were in fact "bona fide" interest was that the importer recorded such payments as interest on in its books in accordance with generally accepted accounting principles. See also C.S.D. 91-10, Supra (the importer does not meet the evidentiary requirements set out in the clarification where the importer does not book the payments to the seller as interest).

In contrast to HRL 545094, in this case, Toyo has not provided any evidence to establish that the alleged interest charges are recorded on its books as interest expenses in conformance with generally accepted accounting principles. Rather, according to the statement on the Customs Form 28, dated March 22, 1995, cited previously, Toyo appears not to carry the charges labeled as interest on the seller's invoices as interest expenses on its books, but as part of the CIF price of the goods. In view of the equivocal language regarding interest charges in the written agreement and that Toyo does not record the charges as interest on its books, we must conclude that protestant has not established that the charges are "bona fide" interest charges. In addition, Toyo has not provided any evidence to demonstrate that the imported merchandise actually sold at the price declared as the "price actually paid or payable." Therefore, the protestant has failed to establish that the amounts labeled on the seller's invoices as interest charges are not included in the appraised value of the imported merchandise.

HOLDING:

In view of the foregoing, the claimed interest charges are included as part of the transaction value for the imported merchandise.

You are directed to deny the protest. A copy of this decision with the Form 19 should be sent to the protestant. 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 the 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 to the public via the Diskette Subscription Service, the Freedom of Information Act and other public access channels.

Sincerely,

Acting Director

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