Request for Reconsideration of Headquarters Letter Ruling 544516 (IA 17/90)

HQ 544689 August 26, 1991 VAL CO:R:C:V 544689 VLB CATEGORY: Valuation Jerry P. Wiskin, Esquire Freeman, Wasserman & Schneider 90 John Street New York, New York 10038 RE: Request for Reconsideration of Headquarters Letter Ruling 544516 (IA 17/90) Dear Sir: This is in response to your letter dated March 26, 1991, requesting reconsideration of a portion of Headquarters Letter Ruling (HRL) 544516 issued January 9, 1991. As you know we met with members of your firm on August 15, 1991. FACTS: You have asked for reconsideration of the third situation that was addressed in HRL 544516. In that situation, the importer, General Electric Medical Systems (hereinafter referred to as "GEMS"), paid the foreign manufacturer, Bildsystem, Ltd. (hereinafter referred to as "Bildsystem") $224,375 to produce 25 Proview Systems. However, after 15 Proview units had been shipped, GEMS' marketing plan changed and it asked Bildsystem to cancel production of the remaining units. This resulted in a balance of $89,750 remaining from the original $224,375 that GEMS had paid to Bildsystem in advance of the production. Counsel for GEMS has indicated in prior submissions that GEMS did not seek to have the cash advance refunded because it wanted to retain Bildsystem's good will. As explained in HRL 544516, "for bookkeeping purposes", GEMS recorded $38,750 of the remaining amount as development costs for a system called the "Proview Plus" and recorded $51,000 as a retroactive price adjustment on 68 previously imported Proview units. Counsel contended that this "bookkeeping" treatment amounted to a cancellation fee that GEMS paid to Bildsystem. - 2 - We held in 544516 that GEMS had failed to establish that the $89,750 was a cancellation fee that was not part of the "price actually paid or payable" for the imported merchandise. This was based on the fact that there was no written notice of cancellation, as required by the terms of the purchase agreement, nor any evidence of a subsequent cost settlement between GEMS and Bildsystem. You have attached three exhibits to your letter requesting reconsideration which you contend establishes the factual basis for establishing that the $89,750 was a cancellation payment. Exhibit "A" to the submission is a copy of an internal GEMS memorandum dated October 6, 1987. The memorandum contains a discussion of the internal GEMS accounting treatment of the $89,750. Exhibit "B" is a memorandum dated November 3, 1987, from GEMS to Bildsystem outlining a two-step process for liquidating the $89,750 balance. The process involved Bildsystem sending GEMS two invoices indicating the amounts were being applied to different products. However, each invoice was "for billing purposes only". Finally, Exhibit "C" consists of the two Bildsystem "for billing purposes only" invoices and two Bildsystem Credit Notes against the invoices. All of these documents are dated November 4, 1987. It should be noted that these invoices were in the file that accompanied the original Request for Internal Advice, and were considered when HRL 544516 was issued. ISSUE: Whether GEMS has submitted sufficient information to establish that the advance payment of $89,750 was a cancellation payment. LAW AND ANALYSIS: As stated in HRL 544516 the preferred method of appraisement is transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a; TAA). Transaction value is defined in section 402(b)(1) of the TAA as the "price actually paid or payable for the merchandise when sold for exportation to the United States" plus enumerated statutory additions. - 3 - The term "price actually paid or payable" is 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." As you know, Customs has held that a payment from the buyer to the seller for cancellation of a production order does not constitute part of the price actually paid or payable for the merchandise already imported when it has been established that the payment is clearly a charge for termination and merchandise is not imported to the U.S. as a result of the terminated contract. (See HRL 543088, dated June 28, 1983; HRL 543770, dated October 23, 1985; HRL 544121, dated June 24, 1988.) In the present case, one sum, $224,375, was advanced to Bildsystem for the production of the Proview units. The new documents that have been submitted, exhibits "A" and "B" do not support GEMS' claim that $89,750 was paid for the right to cancel the purchase agreement. Rather, the evidence simply indicates how GEMS internally handled the $89,750 balance. GEMS internal treatment of the balance does not convert the payments into cancellation payments. Thus, we affirm the holding in HRL 544516 that GEMS has failed to establish that the $89,750 was a cancellation payment. HOLDING: The holding in HRL 544516 that there is no authority to deduct the $89,750 from the price actually paid or payable for the imported Proview units is affirmed. Sincerely, John Durant, Director Commercial Rulings Division