Dutiability of interest charges paid to seller

HQ 544970 October 20, 1993 VAL CO:R:C:V 544970 ILK CATEGORY: Valuation --------------------- ---------------------------- --------------------- ------------------- RE: Dutiability of interest charges paid to seller Dear ---------: This is in response to your letter of April 2, 1992 (hereinafter referred to as the "request"). On behalf of your client ----------------------- (hereinafter referred to as the "buyer") you request a ruling regarding the dutiability of interest charges paid by the importer to a related foreign manufacturer (hereinafter referred to as the "seller"). Your request, and a letter dated September 3, 1992 ask that certain information supplied with the request be kept privileged and confidential. Based on your identification of information to be kept privileged and confidential, and the reasons given therefore in your letter dated September 3, 1992, we will treat the subject information as confidential and privileged. We regret the delay in responding. FACTS: The buyer a U.S. corporation is anticipating importing --- - --------------------------------------------------------- and related equipment components and parts which are made in [Europe] by the seller. In a telephone conversation with a member of my staff, on July 17, 1992, you stated that the seller may actually be any one of a number of related companies in Europe. The seller is offering the importer two methods of payment for the merchandise. The buyer may elect to pay the seller on a monthly basis the accumulating inventory value of the merchandise (a pay-as-you-go method). Alternatively, the buyer may defer any payment until shipment and then pay the full purchase price of the merchandise all at once, plus a separate interest charge (deferred method). ------------------------------------- ------ -------------------------------------------------------- ------- ------------------------------------------------------- -------- ------------------------------------------------------ --------- ------------------------------------------------- -------------- ----------------------------------------------------- ---------- --------------------------------------------------- ------------ ---------------------------------------------------------------- ---------------------------------------------------------------- ---------------------------------- ---------------- ---------------------------------------------------------------- --------------------------------------------------------- ------ -------------------------------------------------------- ------- -------------------------------------------------- ------------- ---------------------------------------------------------------- -------------- You request a ruling as to whether the interest charge incurred under the deferred payment method is dutiable or non- dutiable, and take the position that the interest charge is non- dutiable. ISSUE: Whether an interest charge paid by the buyer to a seller is part of the transaction value of the imported merchandise. LAW AND ANALYSIS: For the purpose of this response, we are assuming that transaction value is the appropriate basis of appraisement. Transaction value is defined in 402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(b); TAA) as the "price actually paid or payable for the merchandise" plus amounts for the five enumerated statutory additions in 402(b)(1). The parties are related, therefore 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 identical or similar merchandise in sales to unrelated buyers in the U.S. or the deductive or computed value for identical or similar merchandise. This ruling does not address the acceptability of transaction value. Customs has issued T.D. 85-111 dated July 17, 1985, which states that interest payments, whether or not included in the price actually paid or payable for imported merchandise, shall not be regarded as part of the customs value provided that: (a) The charges are distinguished from the price of the goods; (b) The financing arrangement was made in writing; (c) 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 transactions prevailing in the country where, and when the financing was provided. T.D. 85-111 is to apply whether the financing is provided by the seller, a bank or another natural or legal person, and if appropriate, where the merchandise is valued under a method other than transaction value. Subsequently, on July 17, 1989, Customs published a Statement of Clarification for T.D. 85-111 (54 FR 29973) (the "Clarification"). In the Clarification, Customs stated that for 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 further 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." According to the request, ---------------------------- ---- --------------------------------------------------- ------------ ------------------- Thus, from the information you have provided, the criteria in paragraphs (a) and (b) are satisfied. Provided that the buyer can prove, if requested, that the price actually paid or payable for identical or similar merchandise sold without a financing arrangement closely approximates the price declared for the merchandise being appraised, and the X% monthly rate of interest does not exceed the level for such transactions prevailing in the country where and when the financing was provided, the criteria in paragraph (c) of T.D. 85- 111 are satisfied. The request states that ----------------------------- ----- ------------------------------------------- and a period charge is a method of carrying interest expenses in conformance with generally accepted accounting principles ("GAAP"). However, in order to meet the criteria of the Clarification, although the amount claimed as interest is --------------------------------- - ------------, it must be charged to an interest expense account, in accordance with GAAP. HOLDING: The payments made by the buyer to the seller for the interest charges are not part of the transaction value of the imported merchandise, provided the payment is charged to an interest expense account, and that if required, the buyer can prove that the subject merchandise is actually sold at the price declared, and the claimed rate of interest does not exceed the level for such transaction prevailing in the country where and when the financing was provided. Sincerely, John Durant, Director, Commercial Rulings Division