OT:RR:CTF:VS H261556 EE
Debra S. Weiss
9901 IH 10 West, Suite 800
San Antonio, Texas 78230
RE: Transaction value; formula; discounts
Dear Ms. Weiss:
This is in response to your letter, dated January 12, 2015, on behalf of your client HEB Grocery Company (“HEB”), in which you request a ruling concerning the appraisement of certain imported products.
FACTS:
You state that HEB is the importer of record for numerous products that it purchases from unrelated foreign vendors from around the world. Occasionally, the HEB warehouse in the U.S. will receive defective merchandise or items that differ from the sample/specifications upon which the order was placed. You state that the merchandise is shipped on a “Free on Board” or FOB port of embarkation basis. HEB uses transaction value as the method of appraisement for the subject entries. You state that HEB pays the vendors upon presentation of documents, including the commercial invoice, packing list, certificate of origin, etc. This usually occurs while the shipment is in transit. Therefore, the purchase price is paid prior to entry. You state that there is no agency relationship involved in the subject transactions.
You request a ruling as to possible remedies upon receipt of defective merchandise or items that otherwise differ from the sample or order specifications. You claim that HEB may reduce the price paid or payable for the nonconforming or defective merchandise by two different methods: 1) by adjusting the transaction value of the entry covering the shipment at issue by Post Entry Amendment or Protest, or 2) by applying the deduction against a subsequent order from the same vendor.
You submitted the HEB International Sourcing Agreement and the HEB International Logistics Vendor Compliance Manual.
ISSUES:
Whether an agreement prior to importation to a price reduction for defective
or nonconforming merchandise discovered after importation can be considered a formula used to determine transaction value, and whether the discount can be taken into account in determining transaction value;
Whether the price for the merchandise for subsequent shipments may be
renegotiated due to product deficiencies in previous shipments;
Whether deductions related to defective or nonconforming merchandise in a
prior shipment are considered an indirect payment whereby HEB could receive a price reduction on a current importation as a means of settling a debt owed by the vendors.
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 (TAA; 19 U.S.C. § 1401a). The preferred method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. 19 U.S.C. § 1401a(b)(1). If, for any reason, sufficient information is not available with respect to the additions to the price actually paid or payable, the transaction value of the imported merchandise is treated as one that cannot be determined. 19 U.S.C. § 1401a(b)(1).
The term “price actually paid or payable” is defined as:
[T]he 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).
The U.S. Customs and Border Protection (“CBP”) Regulations further provide that in determining transaction value, the price actually paid or payable “will be considered without regard to its method of derivation. It may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula, such as the price in effect on the date of export in the London Commodity Market.” 19 C.F.R. § 152.103(a)(1).
Furthermore, the word “payable” refers to a situation in which the price has been agreed, but actual payment has not been made at the time of importation.
On the other hand, the Statement of Administrative Action states that changes in the price actually paid or payable which are arrived at subsequent to the time of importation shall not be taken into account in determining transaction value. This would apply to renegotiation, deferred quantity discounts, or rebates. Moreover, 19 U.S.C. § 1401a(b)(4)(B) states that “any rebate, or other decrease in, the price actually paid or payable that is made or otherwise affected between the buyer and the seller after the date of the importation of the merchandise into the United States shall be disregarded in determining the transaction value.”
CBP has consistently enumerated three criteria in determining whether a discount or price adjustment should be considered part of the transaction value of imported merchandise. See Headquarters Ruling Letter (“HQ”) 563419, dated May 4, 2006. First, the discount or price adjustment must be agreed on prior to the importation of the merchandise. See Allied International v. United States, 795 F. Supp. 449 (CIT 1992) (importer required to affirmatively show that there was a pre-importation agreement for the claimed discount). See also HQ 964192, dated February 15, 2002 (discounted price constituted the price actually paid for the imported footwear because the discounts were agreed to and effected prior to importation); and HQ 547019, dated March 31, 2000 (discounted price, which was based on established criteria from a price list and was agreed to prior to importation, constituted the price actually paid or payable for the imported merchandise).
The second criterion is that the importer must be able to furnish CBP with sufficient documentary evidence to support the existence of the discount and establish that it was agreed to before the time of entry. See HQ 547144, dated November 20, 1998; see also HQ 545659, dated October 25, 1995 (unconditional discount factored into the value declared at the time of entry and reflected on the invoice presented to CBP, may be taken into account in determining transaction value).
The third criterion requires that the discount or price adjustment be unconditional, or if conditional all the conditions must be met prior to importation. We articulated this criterion in HQ 545659, supra, in which we determined that a discount is unconditional when there are no specified purchasing obligations placed on the customer. In that case, we held with respect to both the unconditional and conditional discounts indicated on the invoice at the time of entry when no amount is rebated, that these discounts are taken into consideration in determining transaction value. In those instances where the customer has not yet fulfilled the specified purchasing obligation at the time of entry, the conditional discounts are not taken into consideration in determining transaction value. Id.
In HQ H241893, dated June 26, 2014, the importer and the seller agreed to a .3% discount which was reflected on the seller’s invoice and corresponded to the payment by the importer to the seller. The discount, agreed to by the parties prior to importation, was to compensate the importer for any defective merchandise. CBP noted that the discount was a fixed percentage and the importer received it regardless whether the merchandise was defective. CBP determined that the defective merchandise discount should be taken into account in determining the price actually paid or payable for the imported merchandise since it was sufficiently documented that the importer and its seller agreed to the discount prior to the importation of the merchandise and the discount was unconditional.
In the instant case, you state that HEB negotiates a price reduction for defective or nonconforming merchandise once a deficiency is discovered after importation. The amount of the price reduction is commensurate with the defects/nonconformance of the products. While the possibility of a reduction in the price actually paid or payable for the merchandise is contemplated and agreed upon prior the exportation, the actual discount or price adjustment is not determined until after importation. As such, we find that the discount should not be considered part of the transaction value of imported merchandise. Further, we do not consider the arrangement to be a formula because the final determination for a reduction in price depends on a subjective factor within the control of the importer, i.e., importer’s examination of the goods after importation.
You also inquire whether the price for the merchandise for subsequent shipments may be renegotiated due to product deficiencies in previous shipments. As previously noted, 19 C.F.R. § 152.103(a)(1) provides that “[i]n determining transaction value, the price actually paid or payable will be considered without regard to its method of derivation. It may be the result of discounts, increases, or negotiations, or may be arrived at by the application of a formula…” In the absence of evidence to the contrary, the renegotiated price for the subsequent shipments, if supported by documents such as invoices and proof of payment from HEB to the vendors indicating that HEB and the vendors agreed to the price reduction before the merchandise was imported in the U.S., would be an acceptable price actually paid or payable consistent with 19 U.S.C. § 1401a(b)(4)(A) and 19 C.F.R. § 152.103(a). See HQ H016107, dated March 16, 2011; see also HQ 544645, dated July 16, 1991.
Lastly, you inquire whether a price reduction on subsequent shipments due to a previous shipment which was found to be defective could be considered an indirect payment of a debt by HEB. 19 C.F.R. § 152.103(a)(2) provides that “[a]n indirect payment would include the settlement by the buyer, in whole or in part, of a debt owed by the seller, or where the buyer receives a price reduction on a current importation as a means of settling a debt owed him by the seller…”
In HQ 543830, dated November 7, 1986, the importer was owed a credit as a result of defects in a prior shipment, and this credit was applied against a later shipment. CBP found that the newly negotiated prices were discounted in satisfaction of a debt owed by the seller to the importer. Similarly, in HQ 543766, dated September 30, 1986, CBP found that a discount given to the importer by the seller on a shipment of ceiling fans should be included in the transaction value of the imported merchandise as an indirect payment. In that case, the importer was owed a credit as a result of defects in a prior shipment. Because the credit was applied against a later shipment, CBP ruled that even though it was not intended at the time the initial shipment was imported that a part of its purchase price would be applied to other goods, the overpayment on the initial shipment was in effect a prepayment for part of the later shipments. Similarly, in the instant case, we find that the credit granted to HEB for previous shipment of defective merchandise represents an indirect payment within the meaning of 19 C.F.R. § 152.103(a)(2) and therefore is found to be part of the price actually paid or payable for the merchandise.
HOLDING:
Based on the information presented, the arrangement between HEB and the vendors is not a formula. The discount should not be considered part of the transaction value of imported merchandise.
The price for the merchandise for subsequent shipments may be renegotiated if supported by documents.
The credit granted to HEB for previous shipment of defective merchandise represents an indirect payment within the meaning of 19 C.F.R. § 152.103(a)(2), and therefore is part of the price actually paid or payable for the merchandise.
Please note that 19 C.F.R. § 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 CBP 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 & Special Programs Branch