VAL: RR:IT:VA 546396 RSD
Port Director
United States Customs Service
300 S. Ferry Street
Terminal Island, California 90731
RE: Application for Further Review of Protest Number 2704-95-101616 concerning the dutiability of alleged interest payments
Dear Director:
This is in response to your memorandum dated May 31, 1996,
forwarding the Application for Further Review of protest number
2704-95-101616, filed on behalf of Trek Bicycle Corp.
(hereinafter Trek) by the law firm of Sonnenberg & Anderson.
Although the protest raises both classification and appraisement
issues, you indicate that the classification issue has been
resolved and that the Application for Further Review is limited
to the appraisement issue.
FACTS:
Trek is a seller and a producer of bicycles. It imports
finished bicycles and bicycle parts from foreign suppliers for
sale in the United States. The Taiwanese supplier of the
products involved in the relevant transactions is Giant
Manufacturing Company (hereinafter Giant). In April 1993, the
parties conducted negotiations regarding the supply of products.
According to Trek, these negotiations resulted in a series of
memoranda, which culminated in a "Memorandum of Intent" sent to
Trek by the General Manager of Giant, dated April 16, 1993. An
unsigned copy of the Memorandum of Intent was enclosed in the
protest file.
The Memorandum of Intent specified that it was to be a
supply agreement effective with the 1994 season. It also
contained provisions regarding the financing arrangements
involved in purchasing products. The financing terms for the
goods Trek imported were specified in paragraph 2(c) of the
Memorandum of Intent, which provides:
Giant shall provide Trek a $16 million (U.S.) D/A line with
90 day interest at 2.1%. Trek shall incur NT currency risk
during the 90 day terms period.
Trek shall provide Giant a 90 day D/A line at 2.1% interest.
All purchases by Trek, beyond the $16 million D/A line,
shall be by 90 day L/C with Trek incurring all L/C related
charges.
Responding to the Memorandum of Intent, Trek sent a signed
memorandum to Giant dated
April 16, 1993, stating:
Trek confirms and agrees with all points/provisions
indicated in the Question & Answer and Memorandum of Intent
documents faxed to us on of April 16, 1993 by Antony Lo.
The protest file also contains a memo from Giant's Anthony Lo, to
Trek dated May 3, 1994, which states "Thank you very much for
your fax April 26, sorry for late reply... Regarding D/A...
"Interest rate on 90 days term remain as 2.10% as our money cost
is high... Yor' (sic) were right on interest issue' you have to
include in the FOB price."
The invoices from Giant to Trek indicate the price for the
goods and have a separate line showing an amount in dollars owed
for interest which is preceded by the words "D/A 90 DAYS-
INTEREST 2.10%." The term of sale shown on the invoices is
F.O.B. TAIWAN.
At issue are the interest charges shown on Giant's invoices
which were included in the transaction value of the imported
merchandise. Your office determined that the charges are
dutiable because there was no written financing agreement, as
required by T.D. 85-111. You note that the Memorandum of Intent
is not signed and the author is not identified. In contrast,
Trek's counsel contends that the submitted documents taken
together constitute a written financing agreement as envisioned
by T.D. 85-111.
ISSUE:
Whether the interest charges shown on Giant's (seller)
invoices should be included in the transaction value of 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. We have assumed for purposes of this decision that
transaction value is the appropriate basis of appraisement.
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 labeled on the invoices
as interest should be included in the transaction value of the
imported merchandise. A 1984 decision of the GATT Committee on
Customs Valuation addressed the issue of the dutiability of
interest costs. The "GATT Decision" states:
The Parties to the GATT Agreement on Implementation of
Article VII of the GATT agree as follows:
Charges for interest under a financing arrangement entered
into by the buyer and relating to the purchase of imported goods
shall not be regarded as part of the customs value provided that:
a) The charges are distinguished from the price actually
paid or payable for the goods;
b) The financing arrangement was made in writing;
c) Where required, the buyer can demonstrate that
Such goods 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 finance was provided
This decision shall apply regardless of whether the finance
is provided by the seller, bank or another natural or legal
person...
Following the GATT Decision, Customs issued Treasury
Decision (T.D.) 85-111, dated July 17, 1985, which concerned the
dutiability of the interest charges paid by the importer. In
accord with the GATT Decision, 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.
The only issue in dispute concerns whether Trek has
satisfied the requirement that the financing arrangement must be
in writing. Your position is that this requirement has not been
satisfied because a written agreement should bear the signatures
of both parties, and the documents are too informal. In this
regard, it is noted that the Memorandum of Intent is not signed
and the author is not identified. Trek's position is that in the
series of transactions with which Customs is presented, there are
a sufficient number of documents, signed by Trek officials, which
indicate a relation to the same financing arrangement. When
integrated, the documents supply the basic terms of a financing
arrangement, applying to all transactions between the parties.
In Headquarters Ruling Letter (HRL) 546056, dated March 22,
1996, the importer offered an invoice, a purchase order, and a
General Terms and Conditions statement, which were to be taken
together as a whole, as evidence of their written arrangement.
The General Terms and Condition statement sets forth the terms of
sale and states that "interest will accrue on items past due from
terms stated above." None of these documents contained specific
information regarding interest rates or a guide for determining
the interest rate. Customs found that there was no written
financing arrangement because the documentation did not contain
specific information regarding interest rates or a guide for
determining the interest rate. Accordingly, the documents
presented together did not constitute a written financing
arrangement as required by T.D. 85-111.
In this case, the Memorandum of Intent sets forth the
financing arrangements. It provides that Giant shall provide
Trek a $16 million (U.S.) D/A line with 90 day interest at 2.1%.
Thus, the interest rate is clearly specified in a written
financing arrangement, and it applies to all transactions between
the parties. Although the memorandum is unsigned, the evidence
establishes that both parties agreed to the terms set forth
therein. The informality of the written communication between
the parties does not negate existence of the written financial
arrangement governing the transactions so long as the evidence
shows that the parties agreed to the terms thereof.
The evidence shows that Giant sent a proposal regarding the
purchase of goods to Trek labeled as the Memorandum of Intent,
dated April 16, 1993. After receiving the Memorandum of Intent,
Trek agreed and accepted all the terms and conditions specified
in the Memorandum of Intent including the terms related to
financing. The acceptance is demonstrated by the memorandum
dated April 16, 1993, sent from Trek's Tom Albers to Giant's Tony
Lo. In this memorandum, Trek indicates that Giant faxed the
Memorandum of Intent to it on April 16, 1993, and that Trek
accepted all its provisions. The specific reference to the
Memorandum of Intent in Trek's correspondence indicates that Trek
had previously received it and consented to all the terms and
conditions specified in it. In sending this memorandum to Giant,
Trek had effectively communicated to Giant its assent to the
terms specified in the Memorandum of Intent, including the
financing terms. In other words, Trek had entered into a binding
agreement.
The parties' subsequent actions further indicate that they
understood that they had agreed to the financing terms set forth
in Memorandum of Intent. This is supported by the invoices from
Giant to Trek, which show a separate line for interest payments
accompanied by the words "D/A 90 DAYS - Interest 2.10%". This
demonstrates that the parties were following the financing terms
specified in the "Memorandum of Intent". In addition, a May 3,
1994, memorandum from Giant to Trek states "Interest rate on 90
days term remain as 2.10%..." This communication confirms that
Giant intended to continue following the financing terms of the
Memorandum of Intent.
Although T.D. 85-111 requires that the financing
arrangement must be in writing, there is no requirement that it
must be in one document, signed by both parties, rather than in
multiple documents. In this case, the evidence indicates that
the parties agreed to a financing arrangement which was specified
in writing in the Memorandum of Intent and other documents.
Accordingly, we find that the financial arrangement was in
writing.
HOLDING:
The financing arrangement between the buyer and seller was
made in writing. Assuming the other requirements set forth in
T.D. 85-111 and statement of clarification are satisfied, the
interest that Trek paid to Giant will be non-dutiable. The
payments shown on the seller's invoices for the interest charges
should not be included in the transaction value of the imported
merchandise.
You are directed to grant 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, Lexis the Freedom of Information Act and
other public access channels.
Sincerely,
Acting Director
International Trade Compliance Division