Application for Further Review (“AFR”) of Protest 3801-10-100399; Discounts

HQ H197899 September 26, 2012 OT:RR:CTF:VS H197899 YAG CATEGORY: Valuation Assistant Port Director, Trade Operations Port of Detroit 477 Michigan Avenue, Room 200 Detroit, MI 48226 RE: Application for Further Review (“AFR”) of Protest 3801-10-100399; Discounts Dear Assistant Port Director: This is in response to your correspondence, dated November 30, 2011, forwarding the Application for Further Review (“AFR”) of Protest 3801-10-100399, timely filed by Braumiller Schulz, LLP, on behalf of the Protestant. This protest decision is being issued subsequent to the following: (1) A review of the Customs Protest, CF 19; (2) A review of the Customs Protest and Summons Information Report, dated November 30, 2011; (3) A review of the attachment of the Protestant, addressed to the Port Director that accompanied the Protest, which contained the Side Letter Agreement, dated June 30, 2009 and the corrected values; (4) A review of Memorandum from the Assistant Port Director, Trade Operations, Port of Detroit addressed to Director, Commercial Rulings Division, dated November 30, 2011; (5) A review of Memorandum from Import Specialist, Detroit, Michigan to Assistant Port Director, Detroit, Michigan, dated October 14, 2011; (6) Submission of the Protestant, dated August 3, 2011, which included payment information in support of the transactions subject to Protest 3801-10-100399; (7) Discount Valuation Analysis, dated August 31, 2011; (8) A submission of the Protestant, dated September 8, 2011, prepared in response to the September 2, 2011 meeting with CBP officials, which included the corrected invoices for the subject entries to reflect the 65% discount; (9) Protestant’s supplemental submissions, dated July 9, 2012, July 24, 2012, August 7, 2012, August 20, 2012, and September 6, 2012, responding to additional questions raised by CBP; and, (10) telephone conference with CBP official on July 18, 2012. FACTS: Protestant imports aircraft components from its unrelated supplier located in Canada. On September 29, 2008, the parties entered into the JT15D Distribution Agreement. According to the Protestant, under Section 4 and Exhibit J of the JT15D Distribution Agreement, Protestant can purchase products from its unrelated supplier at a discount of 48% from the catalogue list price for resale to unrelated third party customers and at a discount of 35% from the catalogue list price for resale to affiliates of the Protestant.  Subsequent to the execution of the JT15D Distribution Agreement, the parties entered into a Side Letter Agreement (“Side Letter”) on June 30, 2009. The Side Letter amended and superseded the JT15D Distribution Agreement with respect to the purchase price of a specific group of products subject to this protest. The Side Letter provided an exception regarding the sale to Protestant of certain products that the unrelated foreign supplier was carrying as “excess inventory” previously destined for new engine production purposes. This excess inventory is sold to Protestant by its unrelated foreign supplier using a variable pricing formula that covers three groups of products. The variable price structure provides incentive to Protestant to sell the excess inventory to their customers before selling other inventory for the time period of June 30, 2009 to June 30, 2012. In fact, all terms and conditions included in the Side Letter became effective on June 30, 2009 and terminated June 30, 2012. The foundation of the price structure is the unrelated foreign supplier’s catalogue list price. The unrelated foreign supplier sets these prices internally and publishes these prices in their catalogues. The Side Letter establishes a purchase price payable by Protestant to its unrelated foreign supplier for all of the excess inventory Groups 1 and 2, relevant to this protest. Paragraph 4 of the Side Letter states that the unrelated foreign supplier shall sell to Protestant the excess inventory at the following purchase prices: Excess inventory identified under inventory groups 1 and 2 at a discount of 85% of the supplier’s 2009 catalogue list prices (purchase price group 1 and 2). Additionally, paragraph 6 of the Side Letter states that until June 30, 2012, for the excess inventory sold in such month by the Protestant to any customers, the Protestant will remit to its unrelated foreign supplier on a monthly basis the following amounts: For any sales of excess inventory group 1 and 2, an amount equivalent to the difference between purchase price group 1 and 2 and a discount of 65% of the supplier’s 2009 catalogue prices. Furthermore, pursuant to paragraph 7 of the Side Letter, if the total payment received by the unrelated foreign supplier from the Protestant under the Side Letter is less than the total purchase price for all excess inventory group 1 and 2, Protestant is obligated to pay its unrelated foreign supplier an amount equal to the total purchase price minus total payment on or before June 30, 2012. On the other hand, if the total payment is greater than the total purchase price, no additional payments will be required for the excess inventory group 1 and 2. These further payments are not at issue here. According to the terms of the Side Letter, Protestant makes a minimum payment of 15% to its unrelated foreign supplier (total purchase price), which corresponds to a 85% discount. If Protestant sells the imported excess inventory merchandise to the U.S. customers, Protestant remits an additional 20% to its unrelated foreign supplier, therefore, bringing the total payment to the seller to 35% and earning the total of 65% discount on its merchandise. In short, parties agreed prior to importation that Protestant would receive a maximum discount of 85% or a minimum discount of 65%. Protestant paid the unrelated foreign supplier for the imported merchandise either during the contract or at the maturity for all of the products. In this case, while Protestant can calculate the price actually paid or payable for the imported goods at the time of importation, Protestant is unable to produce proof of payment until all goods provided for in the entry documents are sold plus one month. The Port argues that the discounts in question appear to be volume discounts that were effective after importation. According to the Port, these discounts were conditional because they were deferred until such time after entry and were not quantifiable. Nevertheless, the Port would allow Protestant to claim the 50% discount since it was notated on the invoices as well as the Side Letter, which was in effect prior to the importation of the merchandise. Protestant states that the imported merchandise had been entered at the value declared on the applicable commercial invoices based on values that reflected a 50% discount from the supplier’s catalogue price. Protestant also states that the correct value should have been based on a complex mathematical calculation provided for in the Side Letter. It is Protestant’s view that the imported goods should have been entered pursuant to a 65% discount off the catalogue price. Protestant argues that the 65% discount was negotiated prior to the importation of the merchandise, and it was unconditional because there were no specified purchasing obligations placed on Protestant. As a result, Protestant seeks to correct the values in question and obtain a refund of overpaid duties. ISSUE: Whether a discount, which Protestant and its foreign seller agreed to prior to importation, should be included in determining the price actually paid or payable for the imported merchandise. LAW AND ANALYSIS: Merchandise imported into the United States is appraised for customs purposes 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 is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. §1401a(b)(1). 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, 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.” The CBP Regulations further provide that in determining transaction value, 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 . . .” 19 CFR §152.103(a)(1). The CBP Regulations further cite the following example: A seller offers merchandise at $100, less a two percent 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. 19 CFR §152.103(a)(1), Example 5. Furthermore, the word “payable” refers to a situation in which the price has been agreed, but actual payment has not been made at the time of importation. On the other hand, the Statement of Administrative Action states that changes in price actually paid or payable which are arrived at subsequent to the time of importation shall not be taken into account in determining a transaction value. This would apply to renegotiation, deferred quantity discounts, or rebates. Moreover, 19 U.S.C. §1401a(b)(4)(B) states that “any rebate, or other decrease in, the price actually paid or payable that is made or otherwise affected between the buyer and the seller after the date of the importation of the merchandise into the United States shall be disregarded in determining the transaction value.” CBP has consistently enumerated three criteria in determining whether a discount or price adjustment should be considered part of the transaction value of imported merchandise. See 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, 795 F. Supp. 449 (CIT 1992) (importer required to affirmatively show that there was a pre-importation agreement for the claimed discount); see also 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 (discounted price, which was based on established criteria from a price list and 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, 1998; 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). The third criterion requires that the discount or price adjustment be unconditional, or if conditional all the conditions must be met prior to importation. We articulated this criterion in HRL 545659, in which we determined that a discount is unconditional when there are no specified purchasing obligations placed on the customer. In that case, we held that with respect to both the unconditional and conditional discounts that are indicated on the invoice at the time of entry when no amount is rebated, these discounts are taken into consideration in determining transaction value. In those instances where the customer has not yet fulfilled the specified purchasing obligation at the time of entry, the conditional discounts are not taken into consideration in determining transaction value. Id. In this case, the relevant discount was agreed on by the parties to this transaction in the Side Letter, dated June 30, 2009. The first entry claiming the discount under this protest was on July 23, 2009 and the last entry was August 24, 2009. Therefore, the discount was agreed to prior to the importation of the merchandise. Protestant furnished to CBP sufficient documentary evidence in the form of the Side Letter to support the existence of the discount and establish that it was agreed to before the time of entry. However, the invoices presented at the time of entry indicated a 50% discount, instead of a 65% discount. Nevertheless, Protestant claims that it miscalculated the discount pursuant to the terms of the Side Letter and furnished the corrected invoices indicating a 65% discount. After carefully reviewing the relevant provisions in the Side Letter, we find that the payment Protestant actually makes under the Side Letter is 35% of the supplier’s 2009 catalogue price, which is consistent with a 65% discount that should have been stated by Protestant on its entries. This also means that the total payment payable to the seller of the imported merchandise should have included the discounts shown on the corrected invoices. See HRL 958003, dated March 9, 1998. However, the question remains as to whether the discount itself is conditional or unconditional. Based on HRL H057716, dated June 30, 2009, Protestant argues that the 65% discount is unconditional because there are no specific purchasing obligations placed on Protestant by its unrelated foreign supplier. In HRL H057716, there was no written agreement between protestant and seller regarding the unconditional percentage discount. In a letter written after the date of importation of the merchandise, the seller confirmed the discount and stated that it was not subject to a minimum purchase, but it was an overall discount on the orders booked in the United States. The discounted amount was reflected on the invoice from the seller to the protestant and on the entry documentation. Accordingly, CBP found that the discount could be used to determine the price actually paid or payable for the imported merchandise. In the instant case, Protestant earns an 85% discount and makes a minimum payment of 15% to the unrelated foreign supplier (total purchase price). If Protestant sells the imported merchandise to the U.S. customers, Protestants remits an additional payment to the seller, bringing the total payment to 35% of the supplier’s 2009 catalogue price. Similar to HRL H057716, the specific discount is negotiated and agreed to prior to the importation of the merchandise. See also HRL 563419, dated May 4, 2006 (CBP found that since the discount was unconditional, agreed to prior to the importation and sufficient documentation was provided, the discount price constituted the price actually paid or payable for the imported merchandise). Moreover, the discount of 65% is not based on the minimum purchase price, but on the merchandise being sold in the United States, which is similar to the overall discount on the orders booked in the United States, specified in HRL H057716. There are no specified obligations or restrictions imposed on Protestant. Thus, we find that the discount in question is unconditional. The Port argues that this discount is a deferred quantity discount, which cannot be determined at the time of importation. We disagree with the Port’s argument. The quantity discount is issued to a customer who commits to purchasing a specified volume either initially or within a specified period of time. See HRL 545659, dated October 25, 1995. Therefore, quantity discounts are deductions from the price of goods allowed by the seller to customers according to the quantities purchased over a given basic period. See Technical Committee on Customs Valuation (“TCCV”) Advisory Opinion 15.1, Treatment of Quantity Discounts. In this case, the discount of 65% does not depend on Protestant purchasing a specified volume of the imported merchandise from its unrelated foreign supplier. The full 65% discount depends on Protestant selling the imported merchandise to the U.S. customers. Therefore, the discount in question is not a deferred quantity or a volume discount. Finally, this discount can be determined at the time of the importation. Protestant either pays the seller during the contract or at the maturity of the contract for all of the products imported. While Protestant can calculate the price actually paid or payable for the imported goods at the time of importation, Protestant is unable to produce proof of payment until all goods provided for in the entry documents are sold plus one month. As we previously stated, the word “payable” in the definition of the price actually paid or payable refers to a situation in which the price has been agreed, but actual payment has not been made at the time of importation. Thus, Protestant may make the actual payment for the goods after the importation, once it reconciles the values with the seller. Accordingly, based on the documentation submitted, we find that the discount in question should be included in determining the price actually paid or payable of the imported merchandise, since this discount is effected prior to the date of importation. HOLDING: Based on the facts presented above, the Protest is granted. In accordance with the Protest/Petition Processing Handbook (HB 3500-08A, December 2007, pp. 24 and 26), you are to mail this decision, together with the CBP Form 19, 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 Regulations and Rulings of the Office of International Trade will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution. Please do not hesitate to contact us at (202) 325-0042 if you have any questions or concerns. Sincerely, Myles B. Harmon, Director Commercial and Trade Facilitation Division