Clarification of HRL 545984; interest charges

HQ 546030 June 13, 1995 VAL R:C:V 546030 CRS CATEGORY: Valuation District Director U.S. Customs Service 300 South Ferry Street Room 1001 Terminal Island, CA 90731 RE: Clarification of HRL 545984; interest charges Dear Sir: The purpose of this letter is to clarify Headquarters Ruling Letter (HRL) 545984, dated May 16, 1995. FACTS: Chatani Enterprises, Inc. (the “buyer”), is a subsidiary of T. Chatani & Co., Ltd. (the “seller”), from which it purchases and imports automobile tires on a c.i.f. basis. The price of the imported merchandise will include an amount for interest. There is a written financing agreement between the buyer and seller, dated August 5, 1994, and the buyer will record the interest amounts on its books as interest expense in accordance with generally accepted accounting principles. ISSUE: The issue presented is whether interest charges incurred after August 5, 1994, and booked as bona fide interest expense in accordance with generally accepted accounting principles, are included in 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 (the “TAA”; 19 U.S.C. § 1401a). The preferred basis 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 amounts equal to certain enumerated additions. However, merchandise will be appraised under transaction value only if, inter alia, the buyer and seller are not related, or if related, the relationship does not affect the price actually paid or payable. 19 U.S.C. § 1401a(2)(A)-(B)). For purposes of this ruling, we have assumed that transaction value is the appropriate basis of appraisement. Interest charges included in the price actually paid or payable by the buyer for imported merchandise are not included in appraised value provided: (1) the interest charges are identified separately from the price actually paid or payable for the goods; (2) the financing arrangement in question was made in writing; and (3) 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 transactions prevailing in the country where and when the financing was provided. These conditions apply whether the financing is furnished by the seller, a bank or another natural or legal person. T.D. 85-111, 19 C.S.D. 258, 259. The term "interest," as used in T.D. 85-111 encompasses only bona fide interest charges, and not simply the notion of interest arising out of delayed payment. Statement of Clarification of T.D. 85-111, 54 Fed. Reg. 29,973 (1989). See also C.S.D. 91-10, 25 C.S.D. 285. In order to be considered bona fide interest expense, the payments must have been booked as interest expense on the buyer’s books in accordance with generally accepted accounting principles. In the instant case, the interest payments will be identified separately from the price of the imported merchandise, there is a written financing agreement, and payments will be booked as interest expense on the buyer’s books in accordance with generally accepted accounting principles. Accordingly, the interest charges are not included in transaction value. HOLDING: Interest charges incurred by the buyer after August 5, 1994, and which satisfy the conditions of T.D. 85-111, are not included in the transaction value of imported merchandise. Sincerely, John Durant, Director Commercial Rulings Division