k Pkwy, Suite 200Bothell, Washington USA 98011-8215

HQ H095412 March 8, 2010 VAL OT:RR:CTF:VS HO95412 RSD CATEGORY: Valuation Mr. Will Dickerson Trade Compliance Analyst Brooks Sports, Inc. 19910 N. Creek Pkwy, Suite 200 Bothell, Washington USA 98011-8215 Dear Mr. Dickerson: This is in response to your letter dated February 19, 2010, regarding the dutiability of certain less-than minimum-order surcharges for fabric used in the production of athletic apparel. A sample copy of an invoice was enclosed with your letter. FACTS: The importer, Brooks Sports, Inc. (Brooks) imports high performance knit athletic t-shirts that it buys from an unrelated apparel manufacturer located in Malaysia. A key raw material used in making the t-shirts is 100 percent polyester fabric. The fabric is produced by an unrelated mill in Taiwan. Brooks instructs the t-shirt manufacturer to source specific fabrics from the Taiwanese mill at the quantities it desires. The cost of the fabric is incorporated into the cost of the t-shirts. The Taiwanese mill requires that a minimum quantity of fabric be purchased or else they will charge an additional less-than-minimum order surcharge (LTM) as a penalty for producing less than an optimal lot size. The minimum quantities vary by fabric quality, but are usually 500 yards per color. When the fabric order does not meet the specified minimum amount, the mill will issue the LTM surcharge per yard. For each new season (biannually), Brooks negotiates and signs a purchase contract with the mill, which provides for the agreed upon fabric costs and LTM penalties. The t-shirt manufacturer notifies Brooks of the LTM order penalty from the fabric mill and Brooks approves the purchase of the small order of fabric and the corresponding LTM order surcharge. The fabric mill invoices the t-shirt manufacturer for both fabric and the LTM surcharge. The t-shirt manufacturer pays the fabric mill for the fabric and the LTM surcharge. In turn, the t-shirt manufacturer bills Brooks for the LTM surcharge which is shown as an additional line item on its commercial invoice. Brooks’ total payment to the t-shirt manufacturer includes payment for the FOB price of the finished t-shirts, as well as for the LTM surcharge. A sample invoice from the t-shirt manufacturer to Brooks provides an illustration of the transaction for a shipment of t-shirts. ISSUE: Whether the importer’s payment to the seller of a surcharge for purchasing a LTM quantity of fabric used in producing the t-shirts would be dutiable as part of the price actually paid or payable? 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 primary method of appraisement under the TAA is transaction value, defined in section 1401a(b)(1), as the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts for enumerated statutory additions. The term “price actually paid or payable” is defined in 19 U.S.C. § 1401a(b)(4)(A) as: [t]he 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 from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for, the benefit of, the seller. There is a rebuttable presumption that all payments made by a buyer to a seller, or a party related to a seller, are part of the price actually paid or payable. See Headquarters Ruling Letter (“HRL”) 545663, dated July 14, 1995. This position is based on the meaning of the term “price actually paid or payable” as addressed in Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990). In Generra, the court considered whether quota charges paid to the seller on behalf of the buyer were part of the price actually paid or payable for the imported goods. In reversing the decision of the lower court, the appellate court held that the term “total payment” is all-inclusive and that “as long as the quota payment was made to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods.” Id. at 379. The court also explained that Congress did not intend for Customs to engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with the purchase of imported merchandise, were for the merchandise or something else. Id. In Chrysler Corp. v. United States, 17 Ct. Int’l Trade 1049 (1993), the court applied the Generra standard and determined that although tooling expenses incurred for the production of the merchandise were part of the price actually paid or payable for the imported merchandise, certain shortfall and special application fees which the buyer paid to the seller were not a component of the price actually paid or payable. With regard to the latter fees, the court found the evidence established that the fees were independent and unrelated costs assessed because the buyer, Chrysler, failed to purchase other products from the seller. Id. at 1056. As such, the fees were not a component of the price of the imported engines. Id. Therefore, the presumption, that all payments made by the buyer to a seller are part of the price actually paid or payable, may be rebutted by evidence which clearly establishes that the payments, like the shortfall charges in Chrysler, are completely unrelated to the imported merchandise. In Headquarters Ruling Letter (HQ) 544340 dated September 11, 1990, CBP considered a transaction in which the vendor imposed an additional charge when the importer did not order a specified minimum quantity of fabric. The ruling stated that it was unlikely that the importer would ever order the minimum quantity of fabric, and thus the total payment for the imported merchandise will usually include the surcharge. CBP concluded that the payment in question was a part of the price actually paid or payable for the imported merchandise. This was to be distinguished from a penalty charge which was independent of the price actually paid or payable for the imported merchandise. Accordingly, we held that the payment for the seller for the failure to purchase the minimum quantity of fabric was a part of price actually paid or payable for the imported merchandise. In this instance, in addition to paying the FOB Price for the T-Shirts, Brooks pays the seller an amount of money that the seller has designated on its invoice as a LTM fabric quantity surcharge. While this LTM quantity surcharge is supposed to be passed on by the seller to the fabric mill, we note that Brooks directs the t-shirt manufacturer to purchase the specific quantities of certain fabric, and thereby it is the party that causes the LTM surcharge from the upstream supplier to be incurred. Additionally, it is a payment that Brooks makes to the seller in order to obtain the merchandise from the seller. As such, the LTM quantity surcharge is directly connected to the production of the merchandise, in that the amount is paid to obtain the fabric that is used in making the merchandise. Most significantly, the payment for the LTM surcharge is made to the seller of the merchandise and not to a third party. Thus, in accordance with Generra, the payment is presumed to be are part of the price actually paid or payable unless rebutted. Brooks has not provided any evidence to rebut the Generra presumption that payments that it makes to the seller are part of price actually paid or payable. We also do not believe that the frequency of the LTM payments is a relevant consideration in determining whether such payments are dutiable. The fact that the payment for the LTM quantity surcharge may only be made occasionally does not negate the fact that the buyer is still making payments to the seller for materials that are directly connected to the imported merchandise. Therefore, we find that the payment Brooks makes to the seller of the t-shirts for the LTM quantity surcharge is part of the price actually paid or payable. HOLDING: The buyer’s surcharge payment to the seller for purchasing less than the minimum order of fabric is part of the price actually paid or payable, and thus is to be included in the transaction value of the imported merchandise. A copy of this ruling letter should be attached to the entry documents filed 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 Customs officer handling the transaction.           Sincerely, Monika R. Brenner, Chief                      Valuation & Special Programs Branch