HQ W545175: Contract cancellation charges; price actually paid or payable

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 W545175
	
January 4, 1995

VAL CO:R:C:V 545175 IOR

CATEGORY:	Valuation

District Director
San Francisco, CA

RE:	Contract cancellation charges; price actually paid or payable

Dear Sir:

This is in response to your internal advice request dated   October 20, 1992 regarding the inclusion in transaction value of contract cancellation charges paid by xxxxxxxx xxxxxxxxx x xxxxxxxxx xxx (hereinafter referred to as the "importer") to its        supplier.  We are in receipt of the importer's submission dated  October 9, 1992, and a supplemental submission dated               September 21, 1994.  This response follows a December 14, 1994   meeting between counsel for the importer and members of my staff in the Value Branch.  We regret the delay in responding.

FACTS:

The subject imported merchandise consists of 458,500         telephone answering systems imported pursuant to a                  November 4, 1991 contract.  The importer had entered into a       contract to purchase an indeterminate number of telephone         answering systems from its unrelated overseas supplier, Standard Telecommunications Ltd. (hereinafter referred to as the "seller")from October 1, 1991 through September 30, 1992.  The contract   was for several different models of answering systems, including model 1516.  According to the importer's submission, the seller'spricing for model 1516 was based on the importer's initial        estimate that it would purchase 700,000 units of all models, and took into account overhead, materials to be purchased and techni-cal staff dedicated to the subject merchandise.  
  
In December 1991, the importer revised its projected         requirement of all models downward from the 700,000 units, and   specifically cancelled the production of model 1516.  The last   shipment of model 1516 was made on February 16, 1992 when only   12,200 units of model 1516 had been imported.  



The contract provides that the importer cannot be held       responsible for the seller's losses, except in the case of a     termination of a purchase order.  However, in the interest of     maintaining good will with the seller, the importer reimbursed   the seller for work in progress and materials for model 1516 and costs incurred for overhead and labor which was reserved but not used as a result of the reprofiling and cancellation of model    1516.  The seller invoiced the importer for these amounts in      February and March 1992.  The invoices from the seller identifiedthe charges as "cancellation charges" for model 1516 and as "overhead and labour cost" due to "reprofile and 1516 cancellation."  The importer's internal documents refer to the invoices as being for cancellation of model 1516 and overhead and labor losses due to reprofiling.  

According to the importer, in the importer’s accounts, the  cancellation payments were accounted for separately from the pay-ments for the imported answering machines.  The importer's        September 21, 1994 submission describes how the cancellation     charges were booked to a separate cost clearing account for non- operating variables as opposed to the inventory account and that the cancellation fees are viewed as period expenses by AT&T.  

The importer takes the position that these amounts paid are cancellation charges and as such are not part of the price        actually paid or payable for the imported merchandise.

ISSUE:

Whether the importer's payment to the seller, for costs     incurred for work in progress, materials, and overhead and labor for merchandise which was contemplated by contract but never     ordered by the importer, is part of the price actually paid or   payable for other merchandise imported pursuant to the same contract.

LAW AND ANALYSIS:

The subject merchandise is being appraised under transactionvalue, which is defined by §402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA, 19 U.S.C.   1401a(b)) as "the price actually paid or payable for the          merchandise when sold for exportation to the United States..."   plus certain additions specified in §402(b)(1) (A)through (E).  

Customs has held that a payment from the buyer to the seller for cancellation of a production order or ordering less merchan-dise than anticipated, does not constitute part of the price     actually paid or payable for the merchandise already imported    when it has been established that the payment is clearly a chargefor termination and merchandise is not imported to the U.S. as a result of the terminated contract.  See Headquarters Ruling       Letter (HRL) 543770 dated October 23, 1985; HRL 544121 dated     June 24, 1988.  

The issue of "shortfall fees" was recently addressed by the Court of International Trade in Chrysler Corporation v. United   States, No. 93-186, slip op. (Ct. Int'l. Trade Sept 22, 1993).   The Court stated that "[a]n expense arising from the failure to  purchase certain merchandise is not a component of the price paidfor the acquisition of other products."  Slip-op. at 11 (emphasissupplied).  In Chrysler, the shortfall fees were provided for in the purchase contracts between the importer and the manufacturer.The Court also considered how the shortfall fees had been treatedin the importer’s accounting records.  The Court held that as thesubject fees were not a component of the price of the imported   merchandise, but an independent and unrelated cost assessed       because the importer failed to purchase a specified quantity of  merchandise, and as the fees were treated separately from the    cost for the imported merchandise, the fees were not part of the price actually paid or payable for the imported merchandise.  Id.at 14.  

In the instant case, as in Chrysler, in the importer's       internal accounting the cancellation payments were accounted for separately from the invoice price of the imported merchandise andwere expensed as opposed to being added to the cost of the
inventory.  In this case the cancellation fees are not provided  for in the purchase agreement between the parties, and the        importer was not contractually required to purchase a specified  quantity of merchandise.  However, the seller's invoices, the     importer's documentation and accounting records establish that   the fees are for expenses incurred with respect to merchandise   that was not imported.  In this case there is sufficient evidencethat the cancellation payments made by the importer are not part of the price actually paid or payable for the imported merchandise.  

HOLDING:

Under the facts presented and evidence submitted in this    case, the importer's payments to the seller, for costs incurred  for work in progress, materials, and overhead and labor for       merchandise which was contemplated by contract but never ordered by the importer, are not part of the price actually paid or       payable for the imported merchandise. 


This decision should be mailed by your office to the         internal advice requester no later than 60 days from the date of this letter.  On that date 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 the public   via the Diskette Subscription Service, Freedom of Information Actand other public access channels.


Sincerely,


John Durant, Director
Commercial Rulings Division