Request for Internal Advice; Transaction Value; Dutiability of Interest Payments; Dutiability of Procurement Service Payments; Dutiability of General Ledger Entry for Labeling Supplies

HQ W563534 May 6, 2009 VAL-2 OT:RR:CTF:VS W563534 CMR CATEGORY: Valuation U.S. Customs and Border Protection Field Director Office of Regulatory Audit 555 Battery Street Suite 313 San Francisco, CA 94111 RE: Request for Internal Advice; Transaction Value; Dutiability of Interest Payments; Dutiability of Procurement Service Payments; Dutiability of General Ledger Entry for Labeling Supplies Dear Field Director: This decision is in response to your memorandum of January 8, 2007, requesting internal advice on two value issues identified in a compliance assessment follow-up of [the importer] which covered importations from January 1, 2004 through December 31, 2004. You specifically request our advice on whether interest payments and procurement service payments should be included in transaction value. In your report, you indicate that based on your review of [the importer’s] importations for calendar year 2004, you included [the importer’s] imports for calendar years 2002, 2003, and 2005 in calculating revenue loss value because you believe the same deficiencies existed in those years. A review of the Compliance Assessment Program Follow-up Audit Report, dated December 15, 2006, and specifically [the importer’s] response to the findings in the report (Appendix III of the report), reveals that [the importer] identified a third issue for which [the importer] requested Regulatory Audit seek internal advice. This third issue is the dutiability of a General Ledger Journal entry identified as “Cost of PVC Bags sent to China.” We address all three issues herein. In preparing this response, consideration has been given to, among other things, the information and arguments contained in the December 15, 2006 Compliance Assessment Program Follow-up Audit Report (including a response from [the importer] to the findings in the report), a March 30, 2007 supplemental submission from [the importer] specifically addressing the dutiability of certain support and affiliation payments (i.e., the procurement service payments), and an April 12, 2007 supplemental submission from [the importer] specifically addressing the dutiability of interest payments to third party vendors. Additionally, information contained in our file for HQ 548332 was reviewed. On September 25, 2008, a meeting was held with counsel for [the importer]. A member of the San Francisco office of Regulatory Audit was in attendance along with personnel from this office. Consideration has been given to the arguments presented to CBP and the additional information provided by the importer’s counsel at that meeting. In addition, a supplemental submission, dated November 11, 2008, was submitted by counsel for [the importer] and the arguments contained therein were considered in reaching our decision set forth herein. The applicability of transaction value is not at issue here and we will assume that it is the correct basis for appraising the merchandise involved. We will extend confidential treatment to information determined to be privileged or confidential commercial or financial information in accordance with 19 C.F.R. 177.2(b)(7). Information for which confidentiality is being accorded will be denoted in brackets in the confidential internal advice response and will be redacted in any public version. FACTS: [Related party X] was the subject of a compliance assessment audit in July 2002. [The importer] was founded in January 2003 by the transfer of the business operation and import activities of [a related party], along with substantially all of [related party X’s] assets and liabilities, to [the importer]. Questions arose regarding the dutiability of interest payments in the course of [related party X’s] compliance assessment and those questions were addressed by this office in Headquarters Ruling letter (HQ) 548332, issued on October 31, 2003, wherein [related party X] was referred to as [“xxxxx.”] [The importer] was the subject of a follow-up compliance assessment audit which has led to this internal advice request. As stated above, the dutiability of interest payments is again an issue, along with procurement service payments to a related party, [Party A], a subsidiary of [related party X], and a single payment for “Cost of PVC Bags sent to China” recorded in [the importer’s] General Ledger Journal. As in HQ 548332, the interest payments at issue were made to unrelated foreign vendors and were billed separately from the invoices for the price of the merchandise. [The importer] argues that the interest payments are not dutiable as there is a written agreement. [The importer] cites to HQ 548332 and argues that it has followed this decision and exercised reasonable care. It also argues that its interest agreements meet the requirements of Treasury Decision (T.D.) 85-111, entitled “Treatment of Interest Charges in the Customs Value of Imported Merchandise,” 50 Federal Register 27886 (July 8, 1985), which, along with a “Statement of Clarification,” 54 Federal Register 29973 (July 17, 1989), sets forth Customs and Border Protection’s (CBP) position on the dutiability of interest charges as part of the price actually paid or payable. Additionally, [the importer] argues that a letter to [related party X] from the Port Director of the Port of San Francisco, dated December 31, 2003, supports [the importer’s] position that the interest payments at issue are not dutiable. In that letter, it was stated that HQ 548332 “held that where written financing arrangements were provided to CBP, [the related party’s] interest payments made after the effective date of these arrangements are not to be included in the price actually paid or payable and are therefore not subject to duty.” Your office argues the interest payments at issue are dutiable for numerous reasons, among them: the interest payments do not meet the requirements of T.D. 85-111, the interest agreements were entered into by [related party X’s] subsidiaries (collectively referred to as [Party B] and not by [the importer], a number of the interest agreements are not dated, and HQ 548332 addressed different circumstances and a different company, i.e., [related party X], and therefore is not applicable to the current matter. In its supplemental submission of April 12, 2007, [the importer] submitted copies of interest agreements from eleven vendors although twelve vendors were identified. Five of the agreements merely have the year, 2004, under the company stamps and signatures. One has the month January under the buyer’s company stamp. Two agreements note the month and year under the vendor’s company stamp and signature, January 2004 for one and February 2004 for the other. Finally, three agreements specify the month, day, and year, under the vendor’s company stamp and signature, i.e., two agreements are dated February 18, 2004, and the other is dated February 23, 2004. The payment terms for all but one of the interest agreements were: D/A 90 days. [The importer] will pay in full within 105 days from Bill of Lading date. Exporter will advance payment to the factory 30 days from date of bill of lading. [The importer] shall pay the exporter two months’ interest at the rate of [xxx%] per month payable on a quarterly basis. One agreement provided: D/A 75 days for merchandise made out of Thailand greige. [The importer] will pay 90 days from date of bill of lading. Interest will be one and a half month at the rate of [xxx%] per month. D/A 90 days for all other merchandise. [The importer] will pay 105 days from date of bill of lading. Interest will be two months at the rate of [xxx%] per month. [The importer] will pay the exporter interest on a quarterly basis. [The importer] also submitted invoices for the interest charges which indicate the shipments and dates thereof to which interest charges are being applied for which payment is due and argues that failure to date the interest agreements does not negate their validity if other documentary evidence exists which establishes effective dates. [The importer] also submitted a copy of the Support and Affiliation Agreement, effective January 1, 2003, and subsequent amended Support and Affiliation Agreement, effective November 12, 2004, as support for its argument that [Party B] had the authority to enter into the interest agreements on behalf of [the importer]. At the meeting with [the importer’s] counsel on September 25, 2008, CBP was informed that thirteen of twenty vendors had written interest agreements. However, as indicated above, this office originally had only eleven written interest agreements in the record for consideration. Counsel also provided charts of the payments of individual vendors reflecting combined early and on-time payments versus late payments. Subsequent to the meeting, counsel submitted an additional interest agreement to this office. This agreement merely had the year 2004 in the body of the agreement and no discernable date under the company stamps. One company was identified twice in [the importer’s] counsel’s list of companies with written interest agreements. Therefore only twelve vendors actually had written agreements and CBP now has copies of all twelve agreements. With regard to the payments made to [Party A] under the terms of the Support and Affiliation Agreement, your office believes that the procurement service payments, in their entirety, are dutiable as part of the price actually paid or payable for the merchandise imported by [the importer] and produced by third party, unrelated vendors. The procurement service payments were to cover the operating expenses of [Party A], i.e., salaries, consultant fees, office rent and general office expenses. According to [the importer], [Party A] sourced fabric or material components outside mainland China and purchased specialized packaging materials for its subsidiaries ([Party B]). [Party A] also served as an office for the chairman of [the importer] when visiting Hong Kong. The chairman would conduct market research on textile trends, fabrics, colors and styles, and [Party A] personnel assisted him in his research and performed consulting work. In addition, [Party A] had three designers on staff, located in Shanghai, whose duties included supporting the U.S. design team by providing information on new trend development, sampling, sourcing raw materials, promotion, etc., and coordinating between Shanghai and the U.S. regarding products and packaging design, showroom display, photographs of products, facilitating U.S. customers’ buying trips, and participation in overseas exhibitions. With regard to the products and packaging design coordination, the [Party A] designers assisted the technical designers in Shanghai in the translation of U.S. designs into production standards and technical specifications for product manufacturing. “When new fabrics are sourced and developed into design concepts, the HK designers would let the China technical designers know what they need to consider to maintain the same look.” These considerations would include, for example, what type of needles and stitch width to use depending on the fabric being used to make the good. For calendar year 2004, the HK designers at [Party A] received [xx xxxxxxxxxxx]. [Party B] arranges for the production and scheduling, shipment and exportation of goods, sourcing and procurement of raw materials, and price negotiations with the various parties involved. It purchases greige fabrics, sells the fabrics to fabric finishing processors (for any dyeing and/or printing and finishing), purchases the finished fabrics from the finishing processors, and then sells the finished fabrics to third party factories that produce the finished goods. The third party factories sell the finished goods to either [the importer] or, if the factory is not licensed to export, to licensed exporters who then sell the finished goods to [the importer]. With regard to the packaging materials (plastic bags, labels, inserts, etc.) purchased by [Party A], [the importer] reimbursed [Party A] for the materials. [Party B] supplied some or all of the packaging materials to the third party vendors, in some cases without charge, in other cases, charging them. [The importer] has acknowledged that paying for the packaging materials that were supplied free of charge to the third party vendors constitutes an assist. [The importer] decided to treat all the packaging materials as assists due to difficulties documenting which were purchased by the third party vendors from [Party B]. However, with regard to a General Ledger Journal entry identified as “Cost of PVC Bags sent to China” and which indicated that [the importer] had purchased and sent [$xxx] of labeling supplies to [Party A], [the importer] claims the entry is an error. [The importer] claims the entry was an estimate based on information later determined to be inaccurate. Your office believes this General Ledger entry is an assist and, as such, dutiable. ISSUE: Are the interest payments made by [the importer] to its vendors pursuant to the written agreements presented to CBP included in the transaction value of the merchandise and thus dutiable? Is HQ 548332, dated October 31, 2003, involving a related party and interest payments a precedential ruling which bars CBP from addressing the issue of the dutiability of the interest payments made by [the importer] to its vendors until CBP follows the procedures set forth in 19 U.S.C. § 1625 to review its decision in HQ 548332? Additionally, is a Port Director’s letter or a CBP auditor’s note an interpretive ruling or decision within the meaning of 19 U.S.C. § 1625? Are the procurement service payments made by [the importer] to [Party A] included in the transaction value of the merchandise and thus dutiable? Is the General Ledger Journal entry identified as “Cost of PVC Bags sent to China” dutiable as packing costs or an assist? Is the reimbursement payment by [the importer] to [Party A] for samples dutiable as part of transaction value? 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) codified at 19 U.S.C. § 1401a. The preferred method of appraisement under the TAA 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, including "the packing costs incurred by the buyer with respect to the imported merchandise . . . [and] the value, apportioned as appropriate, of any assist." 19 U.S.C. § 1401a(b)(1)(A) and (C). These additions apply only if they are not already included in the price actually paid or payable. Interest Payments It is CBP’s position that all monies paid to the seller, or a party related to the seller, are part of the price actually paid or payable for the merchandise under transaction value. See Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990). The court in Generra specifically held that "a permissible construction of the term 'for imported merchandise' does not restrict which components of the total payment may be included in transaction value." Generra, 905 F.2d at 380. Under Generra, the interest charges paid by the importer to the supplier are part of the price actually paid or payable for the imported merchandise. However, T.D. 85-111 sets forth the requirements for the exclusion of interest charges from the price actually paid or payable. Numerous arguments have been made with regard to the interest payments at issue and why they should or should not be dutiable as part of the transaction value. We will not provide a detailed discussion of each argument as it is not necessary to determine the dutiability of the interest payments. An examination of the requirements of T.D. 85-111 is all that is required. T.D. 85-111 states that interest payments should not be considered part of the dutiable value of merchandise if: The interest charges are identified separately from the price actually paid or payable for the goods; The financing arrangement in question was made in writing; Where 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. Among other things, your office disputes whether the financing agreements were made in writing because one of the China subsidiaries, [Party B1] entered into the interest agreements and not [the importer]. [The importer] points to its Support and Affiliation Agreement with [Party A] and [Party B] and argues that [Party B1] had the authority to enter into these interest agreements on [the importer’s] behalf and all parties knew that [the importer] would be bound by these agreements. We agree with your office that the Support and Affiliation Agreement is lacking in specific details of the relationships between the parties and there is a question as to [Party B1’s] authority to act on [the importer’s] behalf with regard to these agreements. However, we see no need to fully address this question here because even if we assume [Party B1] had the authority to act on [the importer’s] behalf, the interest agreements fail to support [the importer’s] claim that the “interest” payments are not dutiable for the reasons stated below. [The importer] admits it did not have written interest agreements with all of its vendors. For those without written agreements, any payments attributable to interest are dutiable as part of the price actually paid or payable by the buyer to the seller. However, with regard to the written interest agreements which have been provided to CBP, in order to meet the terms of T.D. 85-111 as written agreements, it must be demonstrated that the parties actually adhered to the agreements. Your office raises the decision of the court in Luigi Bormiolo Corp. v. United States, 304 F.3d 1362 (Fed. Cir. 2002), in which the appellate court found that the Court of International Trade was correct in holding that Bormioli failed to demonstrate that its financing agreement was in writing. Bormiolo failed to demonstrate the existence of the financing agreement not because written documents did not exist, but because Bormiolo failed to follow the terms of the written agreement. The Court of International Trade found that Bormioli deviated from its written agreement by (1) failing to pay its interest payments quarterly, paying instead on six to twelve months worth of accrued charges at a time; (2) paying an interest rate above the prime rate in Italy at the time when the agreed to rate was the prime rate; and (3) paying late (from between 1 day to 22 days after the payment due date). With regard to the interest rate charged, the court rejected the argument that the interest rate charged, 15 % annually, was reasonable because it was the best interest rate a small start-up company could expect to receive in 1987 (1.5 – 2 % above the prime rate at the time). The court noted that although the prime rate varied between 1987 and 1996, the interest rate charged Bormioli remained constant at 15 % annually. The Court of International Trade in its decision stated: In the absence of evidence showing a prevailing rate other than the prime rate, plaintiff fails to meet T.D. 85-111’s requirement that the interest rate charged Bormioli be less than the prevailing interest rate in Italy at the time of the financing, whether in 1987 or 1996. See Luigi Bormioli Corp., Inc. v. United States, 24 C.I.T. 1148, 1155. In affirming the lower court’s decision, the Court of Appeals for the Federal Circuit stated in its decision: . . . while Customs may choose to ignore a de minimis variation from the terms of a written financing arrangement, the parties’ repeated violation of the salient terms of the arrangement must remove it from coverage under TD 85-111. TD 85-111 does not merely require that the parties have a written financing arrangement, but that the written financing arrangement actually govern the payments at issue. . . . Luigi Bormiolo Corp. v. United States, 304 F.3d 1362, 1372. Your office argues that [the importer] did not follow the terms of the interest agreements by making payments for merchandise in accordance with the time frames set forth in the agreements. [The importer] argues that the variations in payment time frames were de minimis variations and that CBP should consider the average number of days in which all the payments were made and not the actual number of days of payments that deviated from the time frames set forth in the agreements. [The importer] argues that by adopting an average number of days approach any variation from the written interest agreements would be de minimis. According to [the importer], payments due in 105 days were paid on average at 105.09 days and those due in 90 days were paid on average at 95 days. We reject [the importer’s] line of reasoning because the interest agreements are not based on an average payment term, but a definitive payment term, i.e., 90 days or 105 days. Counsel for [the importer] provided charts of the payments of individual vendors reflecting combined early and on-time payments versus late payments. However, while one of the charts indicates the number of payments received after the due dates and the percentage of these late payments in relation to the overall payments, it does not reflect the variation in the time frame of the payments. We also note that the chart indicates that a transaction was considered as paid on the due date if paid within 5 days of that due date. The chart indicates that for the twelve vendors with whom written interest agreements exist, the number of late payments per vendor ranged from zero for one vendor to 509 for another. We will consider individually the vendors for whom it is claimed that less than 10 percent of their payments were paid after the due date. We note that the interest agreement indicating no late payments in fact did have a payment received one day late and another payment which was paid three days early and for which no interest payment was made. See Exhibit 19 of [the importer’s] Supplemental Submission dated April 12, 2007. This particular interest agreement was one of two agreements with the same vendor. The next agreement with the fewest late payments indicates only three late payments received (8.11%). However, a review of Exhibit 19 indicates that for this vendor there were actually six late payments – three payments were each one day late and three payments were each 10 days late. In addition, three payments which were on-time do not show any interest payments; however, we note that two for the same amount appear to be a cancellation of one another. The third entry appears to be a subtraction of an invoice amount without any interest subtraction. The next vendor had only 17 payments which were paid late (4.24%), according to the chart. In fact, there were 101 late payments – 32 were 3 days late, 20 were 4 days late, 32 were 5 days late, 3 were 6 days late, 13 were 7 days late and one was 13 days late. In addition, 5 on-time payments show no interest payments as having been made. See Exhibit 19. Finally, the last vendor for which the chart indicates a less than 10 percent late payment record had 25 late payments (8.87%). However, in actuality the vendor had 97 late payments – 23 were 1 day late, 2 were 2 days late, 29 were 3 days late, 7 were 4 days late, 11 were 5 days late, 3 were 7 days late, 21 were 8 days late, and 1 was 11 days late. In addition, 10 payments which were on-time, 2 payments which were 8 days late, and the payment which was 11 days late all show no interest payments as having been made. In [the importer’s] case a relatively large number of payments were made outside the payment term (from one to 43 days later). Bormioli is directly on point and supports your decision to reject the interest agreements for failing to meet the terms of T.D. 85-111. Additionally, we note that the interest payments were to be made on a quarterly basis. An examination of the information presented fails to show this was the actual practice of [the importer] in making the interest payments. For example, one payment is shown as having a payment date of May 24, 2004, yet the interest payment date is April 28, 2005, more than 11 months after the payment date. In some cases, the interest payment date precedes the payment date. As in Bormioli, [the importer] failed to make its interest payments quarterly per its written interest agreements and it made numerous late payments. Furthermore, as already noted above, [the importer] failed to make interest payments on every payment due. Thus, inasmuch as the written interest agreements were not followed, the record supports a finding that the written financing arrangements did not govern the payments at issue. Bormioli, 304 F.3d at 1372. We agree with your office on the calculation of the annual interest rate for the interest agreements at issue. [The importer] submitted extensive arguments on the proper method of calculating the annual interest rate based on the interest rate expressed in the interest agreements which was “two months at the rate of [xxx%] per month.” Your office determined the annual rate by multiplying the monthly rate by 12 and determining the annual rate to be [xxx%]. This would appear to be the same method utilized by the court in determining the annual rate of interest in Bormioli. In addition, we agree with your office that [the importer] failed to show that the [xxx%] rate of interest was not higher than the prevailing rates in China at the time the financing was provided. In this case, entries from 2004 were the subject of the compliance assessment follow-up and the interest agreements all appear to indicate, at a minimum, the year 2004. Information submitted by [the importer] indicates that the short term (six months or less) interest rates in China in late 2004 were a little over 5%. See Exhibit 15 of April 12, 2007 supplemental submission indicating the 6 month lending interest rate for the Shanghai Pudong Development Bank was 5.22% as of October 29, 2004. See also [Importer’s] letter of April 26, 2005 to Customs Specialist Team 764 wherein [the importer] stated: The interest rate charged by the People’s Bank of China (PBOC) from until November 2004 was 5.31%. The People’s Bank of China is China’s central bank and sets the base interest rates for China. Until November 2004, there was a limit on rates that lenders could charge customers for loans of 1.7 times the official lending rate. Therefore the absolute maximum a lender could charge a customer until November 2004 was 9.027%. [Footnote omitted.] From November 2004, the rate was raised to 5.58%, and the limit on the maximum amount that could be charged was eliminated. Therefore the maximum interest rate became any rate that bank chooses to set. The question is not whether the rate of interest charged is less that the maximum rate a bank in China could charge a borrower, but whether the rate charged is not more than the prevailing rate in China in 2004 for the type of loan provided. In Bormioli, the court rejected the argument that private financing justified a higher than prime rate with nothing more to justify the interest rate. Similarly here, [the importer] asks that we look to the fact that the financing was private, but provides no other evidence to support the argument that the rate was not more than the prevailing rate for that type of financing. The burden is on the importer to show CBP that the interest rate meets the terms of T.D. 85-111 and we do not believe that [the importer] has met its burden. 19 U.S.C. § 1625 issues [The importer] cites HQ 548332 as support for its position that the payments at issue are consistent with T.D. 85-111. HQ 548332 addressed whether interest payments were dutiable as part of the price actually paid or payable in three different situations: (1) Where no written agreement was provided to CBP; (2) Where “declarations” were provided to CBP to confirm the existence of a prior unwritten agreement and “interest invoices” were provided; and, (3) Where written agreements were provided to CBP. It is important to note however that in the case of the written agreements provided to CBP, the question of the dutiability of interest payments was limited to payments for entries that were made prior to the dates of the agreements. This limitation of the scope of the response was repeated in the holding of the ruling. CBP stated: (3) Payments alleged to be “interest” and made by [related party X] to its vendors for which written financing arrangements were provided to [CBP] should be included in the price actually paid or payable pursuant to the transaction value method of appraisement for all transactions made prior to the effective date of the arrangements. [Emphasis added.] This office did not issue a decision on the dutiability of interest payments which were the subject of the written arrangements. However, in the analysis portion of HQ 548332 we clearly stated: . . . Since the rate of interest allegedly paid by xxxxx to its vendors for the five years relevant to this inquiry remained the same while bank interest rates decreased, [CBP] calls into question whether the payments alleged to be interest were actually wholly or partially for interest. * * * [The importer] suggests that the “nature of transactions involving a financial institution and a private party are vastly different than financing provided between two private parties.” The importer further suggests that financial institutions can diversify risk in ways not available to its vendors thereby explaining why bank interest rates would be lower than that charged by its vendors. [CBP] cannot accept this argument, since the importer has provided CBP with no basis or foundation for accepting it. The burden of bringing forward proof, as CBP notes from T.D. 85-111, is on the importer. [Emphasis added.] HQ 548332 cannot be relied upon to argue that the interest agreements at issue meet the terms of T.D. 85-111. The ruling involved a different party, [related party X], involved a different time period (1997 to 2002), did not address whether the written agreements met the terms of T.D. 85-111, and specifically questioned whether the rate of interest met the requirements of T.D. 85-111. The ruling held that “payments alleged to be ‘interest’ and made by [related party X] to its vendors for which written financing agreements were provided to” CBP were part of the price actually paid or payable and thus dutiable “for all transactions made prior to the effective date of the arrangements.” HQ 548332 did not decide whether interest payments for entries that were made subsequent to the dates of the agreements were dutiable. Counsel for [the importer] has cited to a letter from the San Francisco Port Director to the Chief Financial Office of [related party X] as support for the argument that HQ 548332 can be relied upon by [the importer]. In that letter, the Port Director wrote that HQ 548332 “held that where written financing arrangements were provided to CBP, [the importer’s] interest payments made after the effective date of these arrangements are not to be included in the price actually paid or payable and therefore are not subject to duty.” See Letter from San Francisco Port Director to [xx. xxxxxx xxxxxx], Chief Financial Officer, [related party X], dated December 31, 2003. [The importer’s] counsel argues that HQ 548332 must be applied to preclude the interest payments at issue here from being dutiable until such time as CBP follows the procedures in 19 U.S.C. § 1625 to modify or revoke HQ 548332. For the reasons set forth above, we disagree and believe HQ 548332 is not applicable to the transactions at issue herein. Furthermore, we reject the contention that the demand for payment by the port of San Francisco was an interpretive ruling or decision within the meaning of 19 U.S.C. § 1625. First, it was clearly a letter which set forth the loss of revenue with regard to a claimed prior disclosure, not a decision regarding the dutiability of interest payments. The comment regarding HQ 548332 is simply a parenthetical reference to the prior Headquarter’s decision. To elevate such a reference to a ruling or decision is to seriously mischaracterize the nature of the letter. Moreover, as discussed above, [the importer] did not adhere to the terms of the interest agreements, so even if one considered the letter to be an interpretive ruling or decision, which we do not, it would not be applicable here. As for the “note” prepared by a member of CBP’s Office of Regulatory Audit, we again disagree with [the importer’s] counsel that such a note is an interpretive decision subject to the requirements of 19 U.S.C. § 1625. It is not, as counsel suggests, even a letter as there is no addressee on the document. It is unclear for whom the note was prepared or to whom the note was sent. It appears it may have been part of another document, but it clearly does not arise to the level of consideration as an “interpretive ruling or decision.” Volume 19 of the Code of Federal Regulations at § 177.1(d)(1) (19 CFR § 177.1(d)(1)) defines a “ruling” as: . . . a written statement issued by the Headquarters Office or the appropriate office of Customs as provided in this part that interprets and applies the provisions of the Customs and related laws to a specific set of facts. A “ruling letter” is a ruling issued in response to a written request therefor (sic) and set forth in a letter addressed to the person making the request or his designee. . . . 19 U.S.C. § 1625(a), in referring to “interpretive ruling” indicates the term includes any ruling letter, internal advice memorandum or protest review decision. See California Industrial Products, Inc. v. United States, 436 F.3d 1341, 1351 (Fed. Cir. 2006). Packaging materials You contend that the cost of packaging materials (plastic bags, labels, inserts, etc.) purchased by and supplied free of charge by [Party A] to the third party vendors, for which [Party A] was reimbursed by [the importer], constitutes an assist and, as such, should be included in transaction value. We note that while [the importer] and your office both consider the supplying of packaging material to [Party A] to be assists under 19 U.S.C. § 1401a, this office considers the packaging material to fall within the definition of “packing costs” provided in 19 U.S.C. § 1401a(h)(3) and not within the meaning of “assist” provided in 19 U.S.C. § 1401a(h)(1). The term “packing costs” means the cost of all containers and coverings of whatever nature and of packing, whether for labor or materials, used in placing merchandise in condition, packed ready for shipment to the United States. 19 U.S.C. § 1401a(h)(3). In HQ 545154, dated June 3, 1994, CBP determined that price tickets and hang tags, while considered “packing costs,” were not within the meaning of “assists” as they were not incorporated in the imported merchandise. With regard to fabric labels, hang tags, plastic bags, hangers and “OCR tickets,” at issue in HQ 543086, dated October 19, 1983, we determined that as the labels were permanently incorporated into the imported merchandise, they were assists, however, the remaining items were considered “packing costs” for appraisement purposes. As such, the packaging materials consisting of bags and inserts, are packing costs incurred by [the importer] with respect to the merchandise and constitute an addition to the price actually paid or payable under 19 U.S.C. § 1401a(b)(1)(A) to the extent that they are not already included in the price of the goods. See HQ 546043, dated November 30, 1995, wherein, citing to HQ 544230, dated December 22, 1988, we stated: “Retail packing is included in the statutory definition of packing costs and must be added to the price actually paid or payable.” With regard to the cost of the labels supplied by [the importer], the description in the file is unclear as to the nature of the labels. If, as in HQ 543086, the labels are permanently affixed to the imported merchandise, they would fall within assists; however, if in the nature of disposable packaging labels, they would fall within packing costs. Payments for PVC Bags As for the dutiability of a payment to [Party A] for the “Cost of PVC Bags sent to China,” [the importer] claims the amount in the General Ledger reflected a year-end estimate based on partial information which was later determined to be inaccurate, i.e., that it was a potential expense put into a journal entry. They claim the actual transactions were later identified and a request for reimbursement was sent to Hong Kong. [The importer] indicates the earlier journal entry, an error, was replaced with a more accurate entry. Your office is not convinced the original journal entry was an error. You indicate that [the importer] has provided no evidence to substantiate their claim of an error and of a later transaction. The record reflects that [Party A] provided the sellers with the PVC bags and that [the importer] reimbursed [Party A] for the cost. The bags are used to pack the imported merchandise. Based on the information presented, the amount in question represents “packing costs” within the meaning of 19 U.S.C. § 1401a(h)(3). See HQ 543086, dated October 19, 1983 (plastic bags, hang tags, hangers, and OCR (optical character recognition) tickets held to be packing costs which had to be added to the price actually paid or payable). “Procurement Service Payments” You also contend that the payments made by [the importer] to [Party A] pursuant to the Support and Affiliation Agreement are includable in transaction value. This is based, in part, on the argument that [Party A] acquired materials for [the importer] which you believe to be an assist and the procurement service payments are equivalent to commissions for acquiring the assist. Your office believes that unless [Party A] was a bona fide buying agent, the cost of acquiring the so-called assists is dutiable. HQ 544976, dated March 17, 1993, and HQ 545266, dated June 30, 1993, are cited as support for the argument that “commissions” paid to an agent for procuring assists are part of the cost of acquiring the assist and should be added to the price actually paid or payable.” See HQ 544976. See also HQ 545266. In addition, HQ 542975, dated March 9, 1983, is cited as support for arguing that sourcing product components, in this case fabric outside China, and purchasing the packaging materials benefited the manufacturers or sellers and therefore constituted indirect payments. In regard to the “procurement service payments,” the Support and Affiliation Agreement (previously cited) provides in relevant part at paragraph 1: As consideration for the procurement services provided by the Hong Kong Subsidiary, [the importer] shall pay up to [$xxx,xxx] per year of the overhead, taxes, personnel and other operating expenses of the Hong Kong Subsidiary. The Agreement further provides at paragraph 3: [The importer] may, from time to time, procure product, services or supplies through the Hong Kong Subsidiary or the China Subsidiaries; . . . . Based on our review of the matter, the record does not support a finding that [the importer’s] payments to [Party A] for overhead, taxes, personnel (other than the designer salaries discussed below) and other operating expenses are includable in transaction value as part of the price actually paid or payable or as an addition thereto. The payments were not made to the seller or a party related to the seller. Rather, pursuant to the Support and Affiliation Agreement, the payments are made to a party related to the buyer. In HQ 544684, dated July 31, 1992, an importer made payments to employees in India (a manager and four other employees) for salaries, rent and other office expenses. The staff worked exclusively for the importer identifying and selecting manufacturers, obtaining prices on samples, surveying the market for new styles, assisting in the negotiation of prices, executing purchase orders, inspecting the finished goods and signing inspection certificates. Since the payments were not made to the seller or a party related to the seller, CBP ruled that the payments were not part of the price actually paid or payable. Further, the fact that the services performed by the employees appeared to be typical of those performed by a buying agent supported CBP’s determination that the monthly payments to the manager in India for salaries, rent, telephone and fax bills, were not part of the price actually paid or payable and not part of transaction value. In the particular circumstances of this case, [Party A] receives monthly payments from [the importer] for salaries, rent, office expenses, travel, consulting fees, insurance, etc. As in HQ 544684, [Party A] does not provide services to, or for the benefit of, the seller of the imported merchandise, but only provides services to related parties, i.e., [the importer] and [Party B]. In addition, you raise the issue of whether certain market research and design work undertaken by [Party A] constitutes an assist. In this regard, your office considers the assistance rendered to the chairman of [the importer] during his visits to Hong Kong to constitute an assist within the meaning of 19 U.S.C. § 1401a(h)(1)(A)(iv). As noted earlier, the chairman conducted market research on textile trends, fabrics, colors and styles while in Hong Kong and [Party A] personnel assisted him in his research and performed consulting work. In this case, the assistance rendered to the chairman of [the importer] during his visits to Hong Kong included: providing him with an office and local transportation support, consulting on sourcing for product or product components outside of mainland China, providing trend, raw material and other samples to [the importer]. In addition, [Party A] employed three designers who were physically located in Shanghai to assist the technical designers in Shanghai at the China design center in translating U.S. designs into production standards and technical specifications for product manufacturing. Section 402(h) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA) codified at 19 U.S.C. § 1401a(h) provides, in relevant part: (1)(A) The term “assist” means any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of the merchandise: (i) Materials, components, parts, and similar items incorporated in the imported merchandise. * * * Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise. See also 19 CFR 152.102(a)(1)(iv). In taking the view that the activities of [Party A] constitute an assist under 19 CFR 152.102(a)(1)(iv), your office cites to HQ 547642, dated February 13, 2002. That ruling stated that “development services, including designing, developing fashion trends and color palettes, arranging for the production of samples, providing specifications regarding fabric, style, flat sketches and sizing, and determining the best manufacturer for production”, when taken together, constituted services necessary for the production of the merchandise at issue therein and thus assists within the meaning of 19 U.S.C. § 1401a(h)(1)(A)(iv). Based on the information in the file, [the importer’s] chairman conducted market research on textile trends, fabrics, colors and styles with the assistance of [Party A] personnel. [Party A], a related party, also provided the chairman with an office, administrative support, and advice on sourcing product and components. [Party A] personnel also provided [the importer] with raw material and other samples. However, the information in the record is insufficient to support a finding that these activities constituted engineering, development, artwork, design work, and/or plans or sketches that were necessary for the production of the imported merchandise. In contrast, in HQ 547642 the information submitted established that the “development services” at issue were necessary for the production of the merchandise. Moreover, even if the work performed by [the importer’s] chairman constituted design work, it would not be considered an assist inasmuch as [the importer’s] chairman is domiciled in the U.S. 19 U.S.C. § 1401a(h)(1)(B). However, the record does reflect that [Party A] had three designers on staff. The designers supported the U.S. design team by providing information on new trend development, sampling, sourcing raw materials, promotion, etc. Their duties also included coordinating between Shanghai and the U.S. regarding products and packaging design, showroom display, photographs of products, facilitating U.S. customers’ buying trips, and participation in overseas exhibitions. On the other hand, the record also indicates that the designers performed work that was necessary for the production of the imported merchandise. The designers provided assistance to the technical designers at the China Design Center in order to ensure that the production standards and technical specifications necessary for product manufacturing were properly translated to achieve the desired result. This work was supplied directly or indirectly and free of charge by [the importer] in connection with the production of the merchandise to be sold for export to the U.S. Thus, the work of the three designers constitutes an assist under section 402(h)(1)(A)(iv) of the TAA and the value of the assist as reflected by the salaries of the [Party A] designers should be included in transaction value as an addition to the price actually paid or payable for the imported merchandise. See HQ 546511, dated April 15, 1999, holding that the value of an assist consisting of design work provided free of charge was reflected in the payments to the consultants and employees who provided the work. With regard to identifying fabric sources outside of China from which [Party B] then purchases fabric, although the fabric is purchased by [Party B] from the foreign source and then sold to the third party manufacturer, you argue that the service of locating the foreign fabric source should be dutiable as an assist. Your office relies on HQ 545100, dated March 2, 1993, to argue that the payment to an agent for sourcing services would be dutiable if the importer fails to establish a bona fide buying agency relationship. The situation in HQ 545100 differs significantly from the situation at hand. In HQ 545100, the agent, a non-related party, received a 10 percent commission and dealt with the suppliers of the merchandise to be imported in obtaining a price quote. [Party A] is not paid based on a commission basis related to the sales of the merchandise purchased by [the importer], nor does it deal with the manufacturers of the merchandise to be imported. We agree with your office that [Party A] is not a buying agent in relation to the imported merchandise, but neither is it a selling agent. It is a related party who performs certain activities for the benefit of the buyer. Identifying fabric sources outside China was for the benefit of [the importer] and [Party B]. Additionally, an assist must be supplied free of charge or at a reduced cost by the buyer of the imported merchandise for use in the production of the merchandise or its sale for export to the United States. In this case, the fabric is purchased by [Party B] and sold for use in the production of the imported merchandise. There is no evidence that the service of identifying the foreign fabric source provided by [Party A] somehow results in a reduced cost to either [Party B] or the third party manufacturer in the purchase of the fabric. Thus, the purchased foreign fabric is not an assist nor is the service of identifying the foreign fabric source. Even if [the importer] provided a material assist, the costs that it spends in identifying fabric sources would not be considered part of the value of the assist. In HQ 544323, dated March 8, 1990, an importer inquired as to the dutiability of a portion of the costs for time and effort expended by its purchasing and shipping departments in purchasing and arranging shipment of materials supplied to an assembler at no charge. CBP determined that: In this case, the costs incurred by the importer’s Purchasing Department are costs incurred for activities prior to the acquisition of the material. These expenses are not part of the price that the importer will pay the unrelated seller for the merchandise. Therefore, these expenditures are not includable in the value of the material assist. [The importer] does not provide an assist as defined by 19 U.S.C. § 1401a(h)(1)(A)(i). Even if it did, however, in accordance with HQ 544323, the time and effort expended by [Party A] in identifying fabric sources from whom [Party B] may purchase fabrics or obtaining packing materials which were supplied to [Party B] for the unrelated sellers would not be included in the value thereof. You also note that [the importer’s] audited financial statements for the calendar years 2003 and 2004 reference the payment to [Party A] by [the importer] for procurement and management services and indicate that the payment was included in the cost of goods sold. On this basis, you maintain that the amount of the payment is included in transaction value. See [Importer’s] Financial Statements For the Years Ending December 31, 2004 and 2003, at 13, n. 7. In support of this you cite Chrysler Corp. v. United States, 17 CIT 1049, 1055 (1993) (where the court looked to the company’s internal accounting methodology in order to determine whether certain payments were part of the price actually paid or payable). In accordance with Chrysler, you contend that [the importer’s] internal accounting methodology indicates that the payments are related to the imported merchandise and are included in transaction value. In Chrysler the payments were made to the seller. In contrast, the payments at issue were made to [Party A], an affiliate of the buyer. Notwithstanding that the payment was not made to the seller, you also urge that the payment be considered part of the price actually paid or payable on the ground that it benefits the seller. However, nothing in the record supports a finding that the payment was for the benefit of the seller. Moreover, we note that activities undertaken by the buyer on its own account, e.g., advertising, will not be considered an indirect payment to the seller even though they may benefit the seller. The cost of such activities is not to be added to the price actually paid or payable. 19 C.F.R. § 152.103(a)(2). In this case, the work performed by [Party A] was undertaken on behalf of [the importer]. Consequently, there is no basis for including the support and affiliation payment in transaction value on the theory that the work benefited the seller(s) of the imported merchandise. Samples The file indicates that [the importer] reimbursed [Party A] [$xxxxxx.xx] for the costs of samples. The samples were referred to as having been “bought for evaluation purposes” and as “marketing samples.” See [Party A] Data Request Response Form for CBP Audit Requests, dated April 17, 2006. We have inquired as to the nature and purpose of these samples and sought copies of the invoices relating to them in order to determine whether the samples may be considered assists. We note that depending on the specific circumstances, samples may or may not be assists. See 548566, dated October 19, 2004, citing HQ 542830, dated July 28, 1982, in which we stated with regard to samples furnished to a manufacturer, “. . . if the samples conveyed technical information without which an article could be made, they were dutiable as assists[;] [h]owever, if the manufacturer was capable of producing the article without the samples and, in fact, did not use them to manufacture the article, the sample would be analogous to narrative specifications and not an assist.” As noted in HQ 548566, dated October 19, 2004, “any enumerated good or service that is used in connection with and is necessary for the production of the imported merchandise would constitute a dutiable assist if undertaken outside the United States and supplied by (sic) directly or indirectly and free of charge or at a reduced cost by the buyer of the imported merchandise to the foreign manufacturer.” Based on the information submitted, the samples were produced outside the United States and [the importer] reimbursed [Party A] for them. [The importer] asserts that the samples were used for evaluation and marketing purposes. Further, [Party A] indicated it “provided trend, raw material and other samples to [the importer], and the sample purchases were reimbursed by [the importer] to [Party A].” [Emphasis added.] This would indicate that the samples were provided to [the importer], the buyer, and not to any of the third party manufacturers. The reimbursement was from [the importer] to [Party A]. There is no indication in the file that the samples were ever provided to the manufacturers or sellers of the imported merchandise. Therefore, the cost or value of the samples provided to [the importer] by [Party A] is not included in transaction value. HOLDING: The interest payments at issue made by [the importer] to its vendors are dutiable as part of the price actually paid or payable. The packaging materials (plastic bags, labels, inserts, etc.) are packing costs, with the possible exception of the labels which may fall within the meaning of assists depending on the nature of the labels. The payments for the PVC bags represent packing costs which are included in transaction value as an addition to the price actually paid or payable. The procurement service payments are not included in transaction value except for the amount attributable to design work undertaken by [Party A] designers. The amount [the importer] reimbursed [Party A] for samples for evaluation and marketing purposes is not included in transaction value as part of the price actually paid or payable or as an addition thereto. The work undertaken by the [Party A] designers constitutes an assist. The value of that work, as reflected by the salaries of the designers, and apportioned as appropriate, is included in transaction value as an addition to the price actually paid or payable of the imported merchandise. You are to mail this decision to the internal advice applicant no later than 60 days from the date of this letter. On that date Regulations and Rulings of the Office of International Trade will take steps to 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. Sincerely, Monika R. Brenner, Chief Valuation and Special Programs Branch