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HQ H003356





February 2, 2007

CLA-02 RR:CTF:VS H003356 EAC

CATEGORY: VALUATION

Ms. Lori Aldinger
Import Manager
Rite Aid Corporation
P.O. Box 3165
Harrisburg, PA 17105

RE: Dutiability of foreign vendor discount.

Dear Ms. Aldinger:

This is in response to your letter of October 27, 2006, requesting a ruling pertaining to the customs valuation treatment of certain discounts agreed upon between Rite Aid and a foreign vendor. Confidential treatment for certain information identified in the ruling request will be extended in accordance with your request.

FACTS:

You state that Rite Aid will import goods into the United States from unrelated vendors in China. An unrelated buying agent will facilitate the transactions between Rite Aid and the vendors. Rite Aid and the vendors have agreed in advance of importation to a specific percentage discount of price pursuant to the agreements that are described below. Rite Aid has negotiated each agreement with the vendors and participation in the discount programs is optional. The actual amount that Rite Aid will pay each vendor will be the vendor’s price, minus the specific discounts. The discounted amount will be reflected on the invoice from the vendor to Rite Aid.

You have provided sample agreements for a prospective import transaction between Rite Aid and a vendor, including the: (1) purchase order; (2) “Application for New Vendor”; (3) “Promotional Funding Agreement”; (4) “Rite Aid Returns Agreement” which is also referred to as the “Damage Allowance Agreement”; and, (5) the revised terms for the Damage Allowance Agreement.

The vendor and Rite Aid signed the Application for New Vendor, Promotional Funding Agreement, and revised terms for the Damage Allowance Agreement in June 2006. Under the terms of the Promotional Funding Agreement, the vendor and Rite Aid agree to a specific percentage discount from the vendor’s price in advance of shipment. Under the revised terms for the Damage Allowance Agreement, the vendor and Rite Aid agree to a specific percentage discount from the vendor’s price in lieu of the terms in the Damage and Allowance agreement under which vendor’s were charged specified fees for damaged, defective, outdated, or discounted goods. Specific percentage discounts are negotiated on an individual basis with each vendor. Rite Aid issued a purchase order to a vendor for acrylic message magnets on August 10, 2006. The purchase order reflects the discounts as well as the order total, which is inclusive of these discounts. It is expected that the merchandise would be imported into the United States in December 2006.

The scope of this ruling is limited to the treatment of the price adjustments negotiated between Rite Aid and the foreign vendor. For purposes of this ruling, we assume that Rite Aid and the foreign vendor are, in fact, unrelated and that transaction value is the proper basis of appraisement. This ruling does not address whether the transaction between Rite Aid and the foreign vendor is a bona fide sale conducted at arm’s length in which the merchandise is clearly destined for the United States. It also does not address the legal status of the agent referred to by Rite Aid as the “unrelated buying agent.”

ISSUE:

Whether the discounted price Rite Aid and the vendor agree to prior to importation of the merchandise constitutes the price actually paid or payable for the imported merchandise.

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in 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)(l) 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 amounts for the enumerated statutory additions. In order for imported merchandise to be appraised under the transaction value method it must be the subject of a bona fide sale between a buyer and seller, and it must be a sale for exportation to the United States.

The term “price actually paid or payable” is more specifically defined in Section 402(b)(4)(A) of the TAA as:

The total payment (whether direct or indirect) made, or to be made, for the imported merchandise by the buyer, or for the benefit if, the seller.

The U.S. Customs and Border Protection (“CBP”) Regulations further provide that the price actually paid or payable “will be considered without regard to its method of derivation. It may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula” (emphasis added). See, 19 C.F.R. §152.103(a)(1). Moreover, the regulations state that the term “payable” refers to a situation in which the price has been agreed upon, but actual payment has not been made at the time of importation. Id.

An example illustrating a cash discount is set forth in Example 5 in 19 C.F.R. §152.103(a)(1):

A seller offers merchandise at $100, less a 2% discount for cash. A buyer remits $98 cash, taking advantage of the cash discount. The transaction value is $98, the price actually paid or payable.

CBP has enumerated three criteria for determining whether a discount or price adjustment should be considered part of the transaction value of imported merchandise. See, for example, Headquarters Ruling Letter (“HRL”) 563419 dated May 4, 2006. First, the discount or price adjustment must be agreed on prior to the importation of the merchandise. See, Allied International v. United States, 16 CIT 545, 795 F. Supp. 449 (1992) (importer required to affirmatively show that there was a preimportation agreement for the claimed discount). See also, Headquarters Ruling Letter (“HRL”) 964192 dated February 15, 2002 (discounted price constituted the price actually paid for the imported footwear because the discounts were agreed to and effected prior to importation); and, HRL 547019 dated March 31, 2000 (the discounted price, which was based on established criteria from a price list and which was agreed to prior to importation, constituted the price actually paid or payable for the imported merchandise).

The second criterion is that the importer must be able to furnish CBP with sufficient documentary evidence to support the existence of the discount and establish that it was agreed to before the time of entry. See, HRL 547144 dated November 20, 1988. See also, HRL 545659 dated October 25, 1995 (unconditional discount factored into the value declared at the time of entry and reflected on the invoice presented to CBP may be taken into account in determining transaction value); and, HRL 546037 dated January 31, 1996 (discount disallowed when importer failed to submit evidence that it took advantage of an alleged 2% “45 day discount”).

The third criterion requires that the discount or price adjustment be unconditional, or if conditional all the conditions must be met prior to importation. CBP stated this criterion in HRL 545659, in which it was stated that a discount is unconditional when there are no specified purchasing obligations placed on the customer. In that case, it was determined that unconditional discounts, which were reflected on the invoices presented to CBP, could be factored into the declared value of the merchandise provided the conditions were met before importation. CBP also determined that if a conditional discount is agreed to before entry at the time of order placement, and the discount is reflected on the entry documentation presented to CBP, the conditional discount may be used to determine transaction value. Id.

As applied, we must initially consider whether the discounts at issue are agreed upon prior to the importation of the merchandise. In this regard, we note that the documentation submitted with the ruling request shows that Rite Aid and the vendor agreed to the discounts in June 2006 and that the merchandise would not be imported into the United States until December 2006. As such, the first criterion is satisfied because the discounts are agreed upon prior to the importation of the merchandise.

We must next consider whether sufficient documentary evidence has been provided to CBP to support the existence of the discounts and to establish that they were agreed to before the time of entry. After endorsement of the documents that describe the terms for the discounts, Rite Aid issued purchase orders in August 2006. You assert that once the ordered merchandise actually ships, the vendor will issue Rite Aid a commercial invoice that will reflect the total price of the goods, the amount of the discounts, and the discounted (net) price. In addition, the vendor will post on an electronic platform an electronic invoice that will reflect the two discounts as well as documentation constituting proof of payment. It is our opinion that such documentary evidence will support the existence of the discounts and establish that the discounts are agreed to before entry. Accordingly, the second criterion is satisfied in this case.

The third criterion requires that the discount or price adjustment be unconditional, or if conditional, all the conditions must be met prior to importation. In support of the assertion that the discounts in this case are unconditional, you initially note that the terms of the agreements are executed prior to importation and that the discounts are reflected in documentation subsequently generated during the importation process. You further note that there are no specific obligations or restrictions imposed on Rite Aid under the agreements. Accordingly, we agree that the discounts under consideration will be unconditional and that the third criterion is satisfied.

Based on the information submitted, it appears as if the three criteria used to determine whether a discount or price adjustment should be considered part of the transaction value of imported merchandise have been satisfied in this case. Therefore, we find that the discounted price, which is agreed to prior to importation, may be considered in determining the transaction value of the imported merchandise. Please be advised, however, that the actual determination as to the dutiability of the discounted or adjusted price will be made by the appraising officer at the applicable port of entry and will be based on the documentation submitted.

HOLDING:

The discounted price, which Rite Aid and the vendor agree to prior to importation of the merchandise and which is sufficiently documented, constitutes the price actually paid or payable for the imported merchandise, assuming the transaction value method may be used to appraise the imported merchandise.

Please be advised that section 177.9(b)(1), U.S. Customs and Border Protection Regulations (19 C.F.R. §177.9(b)(1)), provides that "[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect." The application of a ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.

A copy of this ruling letter should be attached to the entry documents at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.

Sincerely,

Monika R. Brenner, Chief

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