Dutiability of finance fees paid to a third party unrelated to the seller; transaction value

May 24, 2010 HQ H099255 OT:RR:CTF:VS H099255 YAG CATEGORY: Valuation Ms. Barbara Y. Wierbicki Tompkins & Davidson, LLP 5 Hanover Square 15th Floor New York, NY 10004 RE: Dutiability of finance fees paid to a third party unrelated to the seller; transaction value Dear Ms. Wierbicki: This is in response to your request, dated March 23, 2010, on behalf of Company A, the importer, requesting a binding valuation ruling concerning the importation of certain home textile products. FACTS: Company A is an importer and distributor of home textile products, including bed, table, toilet, and kitchen linens, which it purchases from various unrelated manufacturers/sellers in the Far East. The proposed term of sale is FOB. The merchandise will be shipped directly to Company A from the overseas suppliers. A “Financing Agreement” between Company A and Company B, the lender, signed and dated March 10, 2010, a sample purchase order, sample manufacturer’s invoice, and Company B’s invoice to be issued to Company A for reimbursement of payment remitted on behalf of Company A to the manufacturer of the imported merchandise and for its financing fee were submitted for our review. On March 10, 2010, Company A entered into a Financing Agreement with Company B, the lender, to help finance its international trade operations. Company B is a service company in Hong Kong and is related to Company A within the meaning of 19 U.S.C. §1401a(g). Under the terms of the Financing Agreement, the exclusive purpose of the agreement is to facilitate the financing of Company A’s transactions. Therefore, pursuant to Paragraph 1 of the Financing Agreement and upon Company A’s request, Company B shall issue letters of credit to the manufacturers/vendors from whom Company A chooses to buy the imported merchandise. According to the Financing Agreement, letter of credit payments advanced on Company A’s behalf shall be subject to an annual financing fee based on London Inter-Bank offered rate and costs. The initial rate under the Financing Agreement shall be based on a certain percentage and calculated from the date of the drawing under the letter of credit for the invoice value from the manufacturer/vendor to the date of repayment by Company A to Company B. The financing fee may be subject to change from time to time by Company B, the lender, which will provide 30 days advance written notice of each such change to Company A. Paragraph 2 of the Financing Agreement also states that notwithstanding the fact that Company B will advance payment to the manufacturers/vendors on Company A’s behalf, title to the merchandise shall pass to Company A from the manufacturers/vendors, in accordance with the terms of purchase from the manufacturer/vendor. Further, pursuant to the terms of the Financing Agreement, Company B is not entitled to take possession of the financed merchandise. Additionally, the Financing Agreement provides for Company B’s certification that it has and will have no direct or indirect relationship to, ownership or financial interest in, or any control of, any manufacturer or vendor from whom merchandise financed under the financing agreement may be purchased. Further, the Financing Agreement provides that no part of any repayments of principle and interest made to Company B will inure to the benefit of any supplier, manufacturer, or vendor, either directly or indirectly. Finally, the merchandise financed under the terms of the financing agreement between Company A and Company B will not be manufactured by Company B or any party related to Company B or Company A. None of the foreign manufacturers or vendors are parties to the financing agreement. ISSUES: Whether transaction value is an appropriate basis of appraisement of the imported merchandise; Are the finance fees, payable by Company A to Company B pursuant to the “Financing Agreement,” additions to the price actually paid or payable in accordance with the transaction value method of appraisement? 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 (19 U.S.C. §1401a; TAA). The preferred method of appraisement of imported merchandise for customs purposes is transaction value. Transaction value is the price actually paid or payable for the merchandise when sold for export to the United States, plus certain enumerated additions. 19 U.S.C. §1401a(b)(1). The term “price actually paid or payable” means 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 from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller. 19 U.S.C §1401a(b)(4)(A). Whether transaction value is an appropriate basis of appraisement of the imported merchandise In order for transaction value to be used as a method of appraisement, it is essential that there is a bona fide sale between the parties. In VWP of America, Inc. v. United States, 175 F.3d 1327 (Fed.Cir. 1999), the Court of Appeals for the Federal Circuit found that the term “sold” for purposes of 19 U.S.C. §1401a(b)(1) means a transfer of title from one party to another for consideration (citing J.L. Wood vs. United States, 62 CCPA, 25, 33, C.A.D. 1139, 505 F.2d 1400, 1406 (1974)). Without a sale for exportation to the United States, transaction value must be eliminated as a means of appraisement. Furthermore, there are special rules that apply when the buyer and seller are related parties, as defined in 19 U.S.C. §1401a(g). Specifically, transaction value between a related buyer and seller is acceptable only if the transaction satisfies one of two tests: (1) circumstances of sale, or (2) test values. See 19 U.S.C. §1401a(b)(2)(B). “Test values” refer to values previously determined pursuant to actual appraisements of imported merchandise. Since this a prospective ruling request, we have not reviewed any documents, except for a sample purchase order to be issued by Company A in the capacity of importer/buyer to an unidentified vendor, and a sample invoice to be issued by an unidentified vendor to Company A that would establish the existence of a bona fide sale between Company A and the unrelated manufacturer/vendor. However, for the purpose of this ruling request, we assume that the transactions between Company A and the unrelated manufacturers/vendors in the Far East are bona fide sales. Moreover, Company A and Company B, the parties involved in the proposed Customs transaction, are, according to information presented by counsel, “related,” as defined in 19 U.S.C. §1401a(g). Again, based on the factual circumstances provided by counsel, Customs and Border Protection (“CBP”) does not deem it necessary to review 19 U.S.C. §1401a(b)(2)(B) addressing transaction value between related parties to respond to this ruling request. Although Company A is the buyer in the proposed transaction, the seller is not Company B but unrelated foreign manufacturers. Therefore, provided that there is a bona fide sale between Company A and its manufacturers/vendors, and taking into account that Company A and its manufacturers/vendors are not related, we find no reason why the imported merchandise cannot be appraised under the transaction value method of appraisement. Are the finance fees, payable by Company A to Company B pursuant to the “Financing Agreement,” additions to the price actually paid or payable in accordance with the transaction value method of appraisement? Appraising merchandise pursuant to the transaction value method involves determining, among other matters, the “price actually paid or payable.” 19 U.S.C. §1401a(b)(1). Paragraph (b)(4)(a) of section 1401a states that the “price actually paid or payable” means the total payment made or to be made by the buyer to or for the benefit of the seller for imported merchandise, whether the payment is made directly or indirectly, with certain enumerated exclusions. Counsel suggests in this ruling request that the “price actually paid or payable” should not include the finance fees to be paid by Company A to Company B, pursuant to the executed Financing Agreement. Counsel directs the attention of CBP to the Headquarters Ruling Letter (“HRL”) W548547, dated March 7, 2006. In HRL W548547, CBP considered, among other issues, the dutiability of interest and finance fees. Specifically, CBP addressed a proposed financing agreement between the Importer (“ABC”) and a related party company (“XYZ”), the lender, neither of which were related to any of the manufacturers of the imported merchandise. The proposed financing agreement in HRL W548547 obligated ABC to pay a service charge for each month’s activities, which was $75 or 1 percent of the aggregate face amount of accounts receivable in which XYZ obtained a security interest, whichever was greater. The foreign manufacturers were not parties to the financing agreement and no payments, either directly or indirectly, inured to them. In HRL W548547, the requestor argued that pursuant to the Decision (T.D.) 85-111, as published in 50 Fed. Reg. 27886 (1985) and as clarified by Customs in 54 Fed. Reg. 29973 (1989), the interest payments and finance fees were not part of the price actually paid or payable. We found that the interest payments and finance service fees paid to a lender that was not also the seller were not included in the price actually paid or payable to determine the transaction value of the relevant entries and that the review of T.D. 85-111 was not necessary because: (1) ABC and XYZ did not have a relationship of buyer and seller; and (2) neither the interest payments or service fees inured directly nor indirectly to the benefit of the unrelated seller-manufacturers. We agree with counsel’s assertion that HRL W548547 is directly applicable to this case. Even though Company A and Company B are related, the companies do not have a relationship of buyer and seller. Pursuant to the Financing Agreement between these parties, the finance fees will not inure, directly or indirectly, to the benefit of the unrelated sellers/manufacturers. The manufacturers are not parties to the Financing Agreement. Additionally, neither Company A nor Company B are related to any of the manufacturers/sellers. Therefore, a review of the guidance provided in T.D. 85-111 is not necessary, and the finance fees, paid to a lender that is not also the seller, need not be included in the price actually paid or payable to determine the transaction value of the imported merchandise. HOLDING: Based on the information provided, we find that transaction value is an acceptable method of appraisement and the finance fees need not be included in the price actually paid or payable since the lender, Company B, is not also the seller of the merchandise proposed to be imported. Please note that 19 CFR §177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”    Sincerely, Monika R. Brenner, Chief Valuation and Special Programs Branch