Request for Reconsideration of HRL 545456

HQ W545995 October 12, 1995 VAL R:C:V W545995 LR CATEGORY: Valuation Port Director U .S. Customs Service Chicago, IL RE: Request for Reconsideration of HRL 545456 Dear Sir: HRL 545456, October 21, 1994, was issued to the District Director, Chicago, in response to a memorandum from the Regional Director, Regulatory Audit Division, requesting internal advice regarding the correct basis of appraisement for merchandise imported from Mexico by American Shizuki Corporation ("ASC"). We have received letters dated May 9 and July 20, 1995, from ASC 's counsel, Stein Shostak Shostak & O'Hara, requesting reconsideration of the ruling. A meeting was held at Headquarters on July 11, 1995 with counsel, company representatives and representatives of the Regulatory Audit Division, St. Louis Branch ("RAD"). That office provided us with their written comments. FACTS: The facts, as stated in HRL 545456, are as follows: ACS, the buyer in this transaction, supplied U.S. materials and equipment free of charge to its wholly-owned Mexican subsidiary, Shizuki Electronica ("SE"), which used them to manufacture electrical capacitors. SE, the seller in the instant transaction, sold finished capacitors to ASC, its sole U .S. customer. Due to continuing losses, SE was closed on January 29, 1993. The transfer price of the imported merchandise was negotiated between ASC and SE. However, in addition to the transfer price, ASC sent regular weekly payments to SE which were used to pay the latter 's operating expenses , including labor, overhead and administrative costs. While the amounts in question were related to the imported merchandise, they were not identified with specific shipments. RAD advised that on ASC 's books, the payments were recorded as a credit to cash and a debit to accounts payable. The latter account reflected the amount ASC owned for imported merchandise. Correspondingly, the payments were recorded by SE as a debit to cash and a credit to accounts receivable. The receivable account was the mirror image of ACS 's payable account, and represented the amount SE was due from ASC for the capacitors. The payments were deposited in SE's checking account. Based on the facts presented, Customs concluded that the buyer 's and seller's own books establish that the payments in question were treated as part of the price of the imported capacitors. Consequently, Customs determined that these amounts are part of the price actually paid or payable for the imported merchandise. Customs also found that the materials and equipment supplied by ASC to SE constituted assists. In the request for reconsideration, counsel states that ASC did not supply U.S. materials or equipment free of charge to SE. It claims that these items were sold to SE. Evidence was submitted to support this claim. RAD now confirms that this is the case and that no assists were furnished to SE. Therefore, based on these new facts, we find that no assists were furnished to SE. Counsel reiterates its position that the cash payments from ACS to SE were not part of the total payment for the imported goods. To the contrary, it maintains that these amounts were loans made by ACS to SE which SE repaid in December 1993. Counsel has submitted financial records for the years 1989-1994 reflecting the manner in which the payments to SE were booked by both parties, comments from the company's Vice President of Finance/Administration, and Audit reports from Mancera S.C. and from Ernst & Young. Its contention is that these records show that, in conformity with Generally Accepted Accounting Principles (GAAP) and the facts, the payments from ASC to SE were not intended to be, were not regarded as, and were never treated as part of the "prices paid" for the goods purchased from SE but rather were loans that were ultimately repaid by SE. ISSUE: Whether the additional payments constitute part of the price actually paid or payable for the imported 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 Agreement Act of 1979 (TAA ; 19 U .S .C . §1401a. The preferred method of appraisement is transaction value defined as the "price actually paid or payable for the merchandise when sold for exportation to the United States" plus certain enumerated additions. Section 402(b) (1) of the TAA. The "price actually paid or payable" is 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 to, or for the benefit of, the seller." 19 U .S.C. §140la(b)(4)(A). In HRL 545663, July 14, 1995, Customs addressed whether certain payments to the seller were part of the price actually paid or payable of the imported merchandise. The background discussion in that ruling, set forth below, is applicable here. Two recent court cases have addressed the meaning of the term "price actually or payable." In Generra Sportswear Co. v. United States, 8 CAFC 132, 905 F.2d 377 (1990), 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." The court also explained that it did not intend that Customs engage in extensive fact-finding to determine whether separate charges, all resulting in payments to the seller in connection with purchase of imported merchandise, were for the merchandise or something else. In Chrysler Corporation v. United States, Slip Op . 93-186 (Ct. Int'l Trade, decided September 22, 1993), the Court of International Trade 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 that the evidence established that the fees were independent and unrelated costs assessed because the buyer failed to purchase other products from the seller and not a component of the price of the imported engines. Accordingly, it has been our position that based on Generra, there is a presumption that all payments made by a buyer to a seller are part of the price actually paid or payable for the imported merchandise. However, this presumption may be rebutted by evidence which clearly establishes that the payments, like those in Chrysler, are completely unrelated to the imported merchandise. In this case, we find, as we did previously, that the payments ASC made to SE are part of the price actually paid or payable for the imported capacitors. As discussed below, ASC has not demonstrated that such payments are completely unrelated to the imported merchandise. The financial information provided was reviewed by RAD. Its conclusion is that ACS's accounting records and SE's accounting records do not show that any portion of ACS's cash payments to SE were loans. It notes that the balance sheets of both ASC and SE show that their transactions are listed in an intercompany account. The accounting titles for these accounts are Mexican Receivable (Account 20556) and Mexican Payable (Account 20557). The intercompany account includes the amount the parties agreed to pay and receive as a result of SE's sale of goods to ASC. The cash payments from ASC to SE, used by SE for direct labor and expenses necessary to produce the imported goods, are included in these accounts and are not identified as loans. According to RAD, an intercompany loan should be listed in the individual accounts of each party. SE should show an account in the Current Liability Section of the Balance Sheet titled "Notes Payable - Short Term." Conversely, ASC should have in their Current Assets Section of the Balance Sheet an account title "Note Receivable - Short Term." This was not done. Similarly, the Mexican subsidiary's Balance Sheet did not list any short term or long term notes payable to ASC or anyone else. Instead, as noted above, all cash payments flowed though ASC 's intercompany account consisting of Mexican Receivable and Mexican Payable. The latter includes the amount due to Mexico for the imported goods and the cash payments simply decreased the Mexican Payable account. No separate transaction was made to show that any of this cash payment was part of a loan. Similarly, RAD indicates that SE's balance sheets show that only current liabilities were owed to ASC. The fact that the cash balance in the intercompany account was returned to ASC after the SE property was sold in December 1993 is immaterial. As provided in section 402(b)(4)(A) of the TAA, any rebate of, or other decrease in, the price actually paid or payable that is made or otherwise effected between the buyer and seller after the date of importation of the merchandise into the United States shall be disregarded in determining transaction value. According to RAD, the last finished goods shipped from SE to ASC was made in December 1992. The later entries consisted of material and equipment returned to ASC upon the closing of SE. Thus, this "repayment" does not reduce the price actually paid or payable. Counsel also refers to the Audit Reports of Ernst & Young and Mancera S .C . which state that ASC's and SE's books were kept in conformity with Generally Accepted Accounting principles (GAAP). Based on these statements, it claims that the method of handling the open account loans was accepted by them as being correct. RAD agrees that ASC 's method of handling the open account was acceptable because the financial statements do not indicate that the open account was a loan but just a current liability on SE's Balance Sheet. RAD further states that ASC's consolidated financial statement will not reflect these transactions because SE's financial information is incorporated into their financial statements. Because these open accounts are not considered a loan, RAD concludes that the independent auditors had no reason to question the transactions. In view of the fact that there are no loan documents establishing a loan or any repayment obligation on the part of SE, and that the financial records of the companies do not establish that the payments were loans, we conclude, as we did previously, that the cash payments in question are part of the price actually paid or payable for the imported merchandise. In fact, these payments were used to cover SE's operating expenses, i.e., the costs that SE incurred to assemble the imported merchandise. HOLDING: The additional payments constitute part of the price actually paid or payable for the imported merchandise. Based on the new facts, ASC did not provide any assists to SE. This decision should be mailed by your office to counsel no later than sixty days from the date of this letter. On that date the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Ruling Module in ACS, and to the public via the Diskette Subscription Service, the Freedom of Information Act, and other public access channels. Sincerely, Stuart P. Seidel Assistant Commissioner Office of Regulations and Rulings