Interest payments made by importer pursuant to Working Capital Financing Agreements; transaction value

HQ 545606 November 30, 1994 VAL CO:R:C:V 545606 IOR CATEGORY: Valuation Frank J. Desiderio Esq. Grunfeld, Desiderio, Lebowitz & Silverman 245 Park Avenue New York, NY 10167-0002 RE: Interest payments made by importer pursuant to Working Capital Financing Agreements; transaction value Dear Mr. Desiderio: This is in response to your ruling request dated March 23, 1994 on behalf of xxxxxxx xxxxx, xxx. (hereinafter referred to as "the importer"), an importer of ladies' wearing apparel. You request a ruling on the dutiability of certain interest payments made by the importer. This response follows a June 9, 1994 meeting between you and members of my staff in the Value Branch. We are in receipt of your supplemental submission dated July 15, 1994. We regret the delay in responding. FACTS: The importer proposes to enter into Working Capital Financing Agreements (WCFA) with its unrelated suppliers to provide the suppliers with short term working capital for the purchase of piece goods and yarn necessary for the manufacture of the merchandise. Each WCFA obligates the importer to provide financing to the supplier. A separate WCFA will be entered into for each order of merchandise with respect to which the importer intends to assume the obligation of providing working capital. Under the WCFA, the importer is to provide financing in one of three methods. This ruling concerns two of the three methods, the "third party advance" and the "supplier advance." Under the third party advance method the supplier, acting as agent for the importer, will arrange to borrow funds from a third party (such as a bank) to satisfy the importer's obligation to advance working capital to the supplier. In this situation the interest will be charged by the third party and will accrue from the date that the third party advances the funds. Under the supplier advance method the supplier will use its own funds in connection with the purchase of piece goods, fabric or yarn, and such advance will be made in satisfaction of the importer's obligation to advance working capital. With respect to both of these funding methods, the rate of interest will be agreed upon by the importer in advance of the placement of an order, and that rate will be approved in advance by the importer in writing, as well as the amount of the advance, the advance date and the maturity date. Under both methods the importer will pay the interest by adding the amount for interest to its payment to the supplier for the imported merchandise. The interest charges will be separately identified on the commercial invoice for the imported merchandise. The interest expense will be debited to the expense account as "Interest-O.I.D. on short term obligation" in accordance with generally accepted accounting principles. The interest will be booked separately from the principal advance of funds. You request a ruling as to whether the interest charges incurred by the importer in providing the supplier with a working capital advance are dutiable, and take the position that the interest charges are not dutiable. ISSUE: Whether interest charges paid by the importer to the supplier are 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). It is the position of the Customs Service 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 e.g. Generra Sportswear Co. v. United States, 905 F.2d 377 (Fed. Cir. 1990); Headquarters Ruling Letter (HRL) 544640 dated April 26, 1991. 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. The importer takes the position that pursuant to T.D. 85-111 dated July 17, 1985, the interest charges are not included in the transaction value of the imported merchandise. T.D. 85-111 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 certain conditions are met. 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. The interest charges incurred by the supplier and paid by the importer are not the type of interest charges provided for in T.D. 85-111. T.D. 85-111 applies to interest charges incurred for the payment of imported merchandise, not for financing of the component materials included therein. In this case, the interest charges are incurred by the supplier in financing its acquisition of components for the merchandise to be manufactured. As T.D. 85-111 is not applicable to the subject interest charges, the interest charges are included in the transaction value of the imported merchandise. See HRL 543765 dated August 8, 1986. HOLDING: The payments made by the importer to the supplier to reimburse the supplier for interest charges incurred in the purchase of component material are part of the transaction value of the imported merchandise. Sincerely, John Durant, Director, Commercial Rulings Division