Reconsideration of Headquarters Ruling Letter 546056 regarding the dutiability of alleged interested charges; written financing arrangement; price actually paid or payable

HQ W546399 March 20, 1997 RR:IT:VA W546399 RSD CATEGORY: VALUATION Director, Regulatory Audit Division U.S. Customs Service 610 South Canal Street, 9th Floor Chicago, Illinois 60607 RE: Reconsideration of Headquarters Ruling Letter 546056 regarding the dutiability of alleged interested charges; written financing arrangement; price actually paid or payable Dear Director: This is in response to a request for reconsideration of Headquarters Ruling Letter 546056 from the law firm Siege Mandell & Davidson on behalf of North American Lighting, Inc. (NAL) dated June 3, 1996, regarding the dutiability of alleged interest charges. Accompanying the request for reconsideration were copies of a number documents that were not previously furnished to our office which support counsel's claims. As such, this decision constitutes a new ruling based on the new evidence that was submitted. A meeting was held with counsel to discuss this matter at the Office of Regulations and Rulings on September 17, 1996. FACTS: NAL is in a joint venture of three parent companies, Koito Manufacturing (Koito) (40% ownership), Ichikoh Industries of Japan ("Ichikoh") (10% ownership), and Hella North American Inc. (Rella) (50% ownership). NAL purchases certain maintenance equipment and component parts from these companies, for the domestic manufacture of automotive Lighting product. NAL's imports have been appraised using transaction value. Your office conducted an audit which disclosed that NAL reimbursed Koito and Ichikoh for certain costs that the parties refer to as interest. For shipments of component parts from Koito, the payment is remitted within 90 days after the bill of lading date. For shipments of maintenance equipment, the payment is made within 180 days after the bill of lading date. Pursuant to the financing arrangement involving NAL, Koito, and the Mitsubihi Bank of Japan ("Bank''), Koito obtains immediate payment on the merchandise it shipped to NAL by factoring the unpaid D/A (documents against acceptance) invoice balances to the Bank (i.e., the Bank in essence purchases the accounts receivables, thereby providing financing for Koito's operations). Under the arrangement, the bank makes payment of the discounted invoice amounts to Koito, and NAL remits payment of the purchase price directly to the Bank within the agreed term period (i.e., 90 or 180 days).  In HRL 546056, we pointed out that you found that it is NAL's practice to pay invoices due in a particular month at the end of the month. At the end of the month, after payment of the invoices to the Bank, NAL accrues "interest" payments in its books based on NAL's calculation of the number of days late and the last "interest" rate charged by the Bank. After the Bank receives the late payment on the NAL invoices, it charges Koito "interest" on those late payments, which Koito pays directly to the Bank. After NAL makes payment for the invoices at the end of the month and after Koito pays the Bank for the accumulated "interest" for NAL's late payments, Koito sends NAL a payment status letter and a spread sheet. The payment status letter informs NAL of the total interest the Bank charged and Koito paid for the invoices paid in the last month. It also requests reimbursement for the interest charges from NAL. The spread sheet shows each invoice that NAL paid late and calculates the total amount due per invoice. Your review disclosed that NAL directly reimburses Koito, not the Bank, for the costs incurred because of NAL's delayed settlement on an invoice by invoice basis. You state that approximately 94% of the invoices from May 1992 to March 1994 required a reimbursement. In HRL 546056, based on a review of the evidence, we determined that the "interest" payment made by NAL was paid directly to Koito, the seller, and not the Bank. We explained that Koito was receiving the benefit from such payments. Additionally, we concluded that the payments were related to the imported merchandise and the payments NAL made were based on an invoice by invoice basis and related directly to individual shipments. Thus, we held that these payments were part of the total payment to the seller, Koito, for the imported merchandise and part of the price actually paid or payable. We also considered whether the payments were excluded from transaction value because such payments were bona fide interest payments. After reviewing the documents presented, which included an invoice, a purchase order, and a General Terms and Conditions statement, we concluded that the payments did not constitute bona fide interest, which satisfied the requirements of T.D. 85-111 because the documentation did not constitute a written financing arrangement. This determination was based on the fact that the documents did not contain specific information regarding the interest rate or a guide for determining the interest rate. NAL contends that our determination in HRL 546056 that the disputed payments did not constitute bona fide interest was incorrect. It further maintains that there is substantial written documentation establishing the requisite elements of a financing arrangement among the NAL, Koito and the bank, pursuant to which the instant interest payment were made. In support of its position, NAL presented correspondence dated April 12, 1989, October 12, 1989, and November 9, 1989, between Koito and NAL which advised NAL of the applicable interest rate for transactions within the specified time period. In addition, NAL presented correspondence in which it confirmed the interest rate that would be applied to "NAL payables Due Koito", dated September 22, 1989.  ISSUE: Whether the alleged interest payments from NAL to Koito are part of the transaction value of 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. 140la. Section 4-02(b)(I) 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. The parties are 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 the buyer and seller 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. As we did in HRL 546056, we have again assumed for purposes of this ruling that transaction value is the appropriate basis of appraisement, but no evidence has been provided to justify its use. The term price actually paid or payable is defined in §402(b)(4XA) of the TAA as: ... 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. NAL does not dispute the findings of HRL 546056 that the payments at issue are considered payments to the seller and part of the price actually pay or payable. Rather, NAL claims that payments should be excluded from the transaction value of the imported merchandise because these payments constitute bona fide interest payments. A 1984 decision of the GATT Committee on Customs Valuation addressed the issue of the dutiability of interest costs. The "GATT Decision" states: The Parties to the GATT Agreement on Implementation of Article VII of the GATT agree as follows: Charges for interest under a financing arrangement entered into by the buyer and relating to the purchase of imported goods shall not be regarded as part of the customs value provided that: The charges are distinguished from the price actually paid or payable for the goods; The financing arrangement was made in writing; Where required, the buyer can demonstrate that --- Such goods 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 finance was provided This decision shall apply regardless of whether the finance is provided by the seller, bank or another natural or legal person... Following the GAIT Decision, Customs issued Treasury Decision (T.D.) 85-111, dated July 17, 1985, which concerned the dutiability of the interest charges paid by the importer. In accord with the GATT Decision, 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: the interest charges are identified separately from the price actually paid or payable; the financing arrangement in question is made in writing; 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 F.R 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. Counsel contends that the interest charges incurred in purchasing the goods should be treated as non-dutiable. He argues that these interest charges meet the conditions of T.D. 85-111, and the clarification in that the interest charges are separately stated from the price of the goods, the financing arrangement was made in writing, the goods are actually sold at the price stated in  the invoice, the interest rate charged was comparable to the prevailing rate for similar transactions in the country where and when the financing was provided, and the importer recorded the payments as interest in its books in accordance with generally accepted accounting principles. In HRL 546056, we determined that the requirements of T.D. 85-111 were not met. We noted that the documents that NAL presented to Customs did not constitute a written financing arrangement because none of the submitted documents contained specific information regarding the interest rate or a guide for determination the interest rate. NAL has now presented additional documents regarding interest payments. In HRL 546396, dated November 29, 1996, we indicated that the various documents must be looked at together to see if they constitute a written financing arrangement. Accordingly, it is necessary to review the submitted additional documentation to determine whether if taken together they constitute a written financing arrangement. The first document is Koito's correspondence dated April 12, 1989, advising NAL of the interest rate applicable for transactions within the specified time period. It also advises NAL of the formula utilized by the Bank in calculating the interest rate and used to assess the interest charges against Koito. The second document is a letter from Koito dated October 12, 1989, to NAL explaining that the Bank had increased the rate of interest applicable to overdue invoices during a certain time period. The third document is also correspondence from Koito to NAL, dated November 1989, indicating the interest rate that will be applied to "NAL payable Due Koito". The fourth document is NAL's correspondence dated September 22, 1989, to Koito confirming the interest rate that will be applied to NAL's payables due to Koito. These letters and documents set forth the applicable interest rate, as well as the methodology by which the interest will be determined and under what circumstances interest will accrue. We note that there are letters from both the buyer, NAL, and the seller, Koito, specifying the interest rates. Accordingly, there was an arrangement put into writing in which the parties understood and agreed to the interest rate charged for financing the transactions. Thus, based on the new evidence presented, we now conclude that there was a written financing arrangement. The next matter that must be considered is whether the interest charges are identified separately from the price actually paid or payable. NAL has furnished a copy of a seller's invoice. In examining the seller's invoice, we note that there is no reference to interest charges. Counsel explains that, at the time of importation, it is not known whether, or to what extent, NAL will chose to use the financing arrangement and whether interest charges will be incurred. Counsel further points out that under the agreed financing arrangement, NAL remits payment of the price paid for the merchandise directly to the Bank and that it carries these expenses as the cost of purchases in its general accounts. Payment of the interest charges, however, is made separately to Koito and is also separately reflected in NAL's books as interest expenses. Because the interest charges are not shown on the invoices or on the seller's price lists, and they are paid for separately, it is possible to determine the price of the goods without the interest charges. Therefore, we conclude that the interest charges are separately identified from the price actually  or payable. In addition, because in some cases the importer paid the price as shown on invoices and price lists without paying the interest charges for identical merchandise, the importer has also presented evidence that demonstrates that the price actually paid or payable for identical or similar goods sold without a financing arrangement closely approximates the price actually paid or payable for goods being appraised. TD 85-111 also requires that the interest rate charges be comparable to the prevailing rate for transactions in the country where, and when, the financing was obtained. Counsel states that the interest rates charged to NAL are, at all times, identical to those which the Bank charged Koito in discounting the receivables. A letter written from Koito indicates that interest rates it charged are directly set in accordance with the official discount rate of Japan from the Bank. In addition, Counsel has submitted documentation from Mitsubishi Bank that shows the interest rate charged by the Bank to Koito is identical to the rate at which NAL reimbursed Koito. Accordingly, we are satisfied that the interest rate charges are comparable to the prevailing rate for transactions in Japan when the financing was obtained. Finally, Counsel states and the auditors from your office found, that NAL entered the interest charges in its books in accordance with generally accepted accounting principles. Therefore, we conclude that the requirements of T.D. 85-111 and the Statement of Clarification for having interest charges determined to be non-dutiable have been satisfied. HOLDING: Based on the new evidence submitted, the interest payments were made pursuant to a written financing arrangement between the buyer and the seller. The evidence also demonstrates that the remaining requirements of the T.D. 85-111 and the Statement of Clarification have been satisfied. Therefore, the interest charges are not included in the transaction value for the imported merchandise. The Office of Regulations and Rulings will take steps to make this decision available to the Customs personnel via the Customs Ruling Module in ACS and the public via Diskette Subscription Service, Freedom of Information Act and other public access channels 60 days from the date of this decision. Sincerely, Acting Director International Trade Compliance Division