HQ 546349: Application for Further Review of Protest Number 1001-96-100720 concerning dutiability of interest charges

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 546349
                                                                 
May 10, 1996

RR:IT:VA  546349 RSD

CATEGORY : VALUATION

Port Director
United States Customs Service
JFK Airport
Jamaica, New York 11430

RE:  Application for Further Review of Protest Number 1001-96-100720 concerning           dutiability of interest charges

Dear Sir:

     This is in response to your memorandum dated April 12, 1996,
forwarding the application for further review in the above
referenced protest; filed on behalf of Toyo Ink America, Inc.
(hereinafter Toyo) regarding the appraisement of crude pigment.

FACTS:

     Toyo purchased the merchandise from Toyo Ink  MFG, Co., Ltd.
of Japan, (hereinafter Toyo Ink) and imported it into the United
States by making three entries, which are the subject of this
protest, at John F. Kennedy Airport on July 10, 1995.  Toyo Ink's
invoices submitted with the entries provide a description of each
item purchased, indicate the quantity of each of the products
purchased, the unit C.I.F. prices, and calculate the amount of
money owed in U.S. dollars for each of the products purchased. 
The total quantity and costs of all merchandise purchased on the
invoices are also tabulated.  Ocean freight, insurance, and
interest charges are deducted from the total cost of all the
merchandise to arrive at an "FOB VALUE".  The invoices show that
the payment terms were 120 days after B/L date.  The interest
rate indicated is 4 percent.  Apparently, the interest rate was
determined based a one percent charge per month times the 4
months that Toyo Inc. afforded Toyo to pay for the goods.  The
protestant reports that in other cases the interest rate was 2.7
percent per month which figured to a total interest charge of 8.1
percent for the 4 months.   

     In appraising the imported merchandise, your office included
the interest payments as part of the transaction value. 
Protestant contends that the interest payments are non-dutiable
and should not be included in the transaction value.  Although
the protest file does not contain a separate written agreement
detailing financial arrangements, a provision regarding price in
the "Contract of General Terms and Condition of Business" between
the parties mentions interest expenses.  This provision states
that "Prices are to be quoted in U.S. dollars on the basis of
C.I.F. New York or other any other U.S.; Port including interest
expense of rate 1% per month on the price unless other specified. 
In case of wide fluctuation in interest rate, this rate could be
changed by mutual agreement."  Your office attempted to find out
how interest payments are carried on Toyo's books by sending a
request for information, Customs Form 28 (CF 28), to Toyo.  In
response to the CF 28, Toyo stated that "We record the CIF price
of the goods purchased, which includes interest as a purchase of
inventory on our books."

ISSUE:

     Whether the amounts designated as interest charges on the
seller's invoices are part of the price actually paid or payable
for the imported merchandise?

LAW AND ANALYSIS:

     As you are aware, the preferred method of appraising
merchandise imported into the United States is transaction value
pursuant to section 402(b) of the Tariff Act of 1930, as amended
by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C.
1401a.  Section 402(b)(1) of the TAA provides, in pertinent part,
that the transaction value of imported merchandise is the "price
actually paid or payable for the merchandise when sold for
exportation to the United States" plus enumerated statutory
additions.  It appears that the parties may be related, and
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 Toyo and Toyo Ink
did not influence the price actually paid or payable or if the
transaction value of the imported merchandise approximates the
transaction value of identical or similar merchandise in sale to
unrelated buyer in the U.S. or the deductive or computed value
for identical or similar merchandise.  Although we have assumed
for purposes of this ruling that transaction value is the
appropriate basis of appraisement, no evidence has been provided
to justify its use.

     The term price actually paid or payable is defined in
402(b)(4)(A) of the TAA as:

     ... 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...)  made, or
     to be made for the imported merchandise by the buyer to or
     for the benefit of, the seller.
     
     This case concerns whether amounts referred to on the
commercial invoice as interest should be included in the
transaction value of the imported merchandise.  Treasury Decision
(T.D.) 85-111, dated July 17, 1985, addressed the issue of the
dutiability of the interest charges paid by the importer.  In
T.D. 85-111 Customs indicated that interest payments, whether or
not included in the price actually paid or payable for imported
merchandise, should be not considered part of appraised value
provided the following criteria are satisfied:


     1. the interest charges are identified separately from the
price   
     actually paid or payable;

     2. the financing arrangement in question is made in writing;
     
     3. when 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
transaction 
     prevailing in the country where, and at the time, when the   
  
     financing was provided.

     On July 17, 1989, Customs published a Statement of
Clarification regarding T.D. 85-111 (54 FR 29973) in which we
stated that for the 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
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."  This
clarification became effective October 16, 1989.  See also,
C.S.D. 91-10 which applied the Statement of Clarification for
T.D. 85-111. 

     In this case, the seller's invoices denote separate interest
charges.  The terms regarding interest are specified in a written
agreement in the provision related to the price of the goods.  
It provides for "interest expense of rate 1% per month on the
prices.  This language suggests that these alleged "interest
charges" may not be "bona fide" interest for financing the
purchase of the goods, but a fee for a delayed payment. 
Accordingly, the other factors outlined in T.D. 85-111 and the
subsequent clarification need to be carefully scrutinized to
determine whether the amounts labeled as interest are in fact
consistent with "bona fide" interest charges.

     In HRL 545094, April 1, 1993, pursuant to a written
agreement the buyer was to pay the seller five percent of the
C.I.F. price of the imported merchandise as the financing cost of
the merchandise.  A sample invoice showed a C.I.F. price,
inclusive of interest from which interest of five percent was
deducted in order to arrive at a C.I.F. price, net of interest. 
In concluding that these charges were non-dutiable as interest
expenses, we noted that the charges were distinguishable from the
price actually paid or payable and there was a written financing
agreement.  To confirm that these payments were indeed "bona
fide" interest payments, the importer provided copies of journal
entries to its general leger which showed the amounts for the
interest payments in question were debited to protestant's
deferred interest account.  Based on this evidence, it was
determined that the interest charges were not dutiable.  Crucial
to the finding that the alleged interest charges were in fact
"bona fide" interest was that the importer recorded such payments
as interest on in its books in accordance with generally accepted
accounting principles.   See also C.S.D. 91-10, Supra (the
importer does not meet the evidentiary requirements set out in
the clarification where the importer does not book the payments
to the seller as interest).

     In contrast to HRL 545094, in this case, Toyo has not
provided any evidence to establish that the alleged interest
charges are recorded on its books as interest expenses in
conformance with generally accepted accounting principles. 
Rather, according to the statement on the Customs Form  28, dated
March 22, 1995, cited previously, Toyo appears not to carry the
charges labeled as interest on the seller's invoices as interest
expenses on its books, but as part of the CIF price of the goods. 
In view of the equivocal language regarding interest charges in
the written agreement and that Toyo does not record the charges
as interest on its books, we must conclude that protestant has
not established that the charges are "bona fide" interest
charges.  In addition, Toyo  has not provided any evidence to
demonstrate that the imported merchandise actually sold at the
price declared as the "price actually paid or payable." 
Therefore, the protestant has failed to establish that the
amounts labeled on the seller's invoices as interest charges are
not included in the appraised value of the imported merchandise.

HOLDING:

     In view of the foregoing, the claimed interest charges are
included as part of the transaction value for the imported
merchandise.   

     You are directed to deny the protest.  A copy of this
decision with the Form 19 should be sent to the protestant.  In
accordance with Section 3A(11)(b) of Customs Directive 099 3550-065, dated August 4, 1993, Subject: Revised Protest Directive,
this decision should be mailed by your office to the protestant
no later than 60 days from the date of this letter.  Any
reliquidation of the entry in accordance with the decision must
be accomplished prior to mailing of the decision.  Sixty days
from the date of the decision, the office of Regulations and
Rulings will take steps to make the decision available to Customs
personnel via the Customs Rulings Module in ACS, and to the
public via the Diskette Subscription Service, the Freedom of
Information Act and other public access channels.

                         Sincerely,




                         Acting Director
                         International Trade Compliance Division