HQ 545606: Interest payments made by importer pursuant to Working Capital Financing Agreements; transaction value

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                                 

                            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