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HQ 546364

December 19, 1996

RR:IT:VA 546364 RSD


Anthony L. Piazza, Esq.
404 Third Avenue
Avon-By-The-Sea, New Jersey 07717

RE: Dutiability of payments to satisfy to a trade debt and a payment to purchase a controlling interest in a factory in Russia

Dear Mr. Piazza:

This is in response to your letter dated May 17, 1996, furnishing additional documents relating to your October 18, 1995, request for a ruling regarding the dutiability of certain payments made by your client, MGL Corporation, to a Russian factory. You also inquire about the duty consequences of reduced payments for imported merchandise to satisfy a trade debt between the same parties. Enclosed with your most recent letter were copies of documents regarding the payment made to the Russian factory, purchase contracts, commercial invoices, shipping documents, and copies of several Customs Form 7501's for a number of entries. We regret the delay in responding.


MGL Corporation (MGL) imports textile products into the United States. Since 1993, MGL has been importing poly/rayon fabric produced by Kortex, a Russian factory. Recently, MGL purchased a controlling interest in Kortex. The final registration of the amendments to the Kortex charter authorizing the sale of a controlling interest to MGL was completed on October 2, 1995. Copies of the contract between MGL and Kortex in English and Russian were submitted. The contract indicates that 956,587 shares of common stock were transferred to MGL from Kortex, for 956,587,000 rubles or $220,100. There are documents indicating there were three wire transfers in the total amount of $220,100 to Kortex drawn on Chase Manhattan Bank. You inquire about the dutiability of the $220,100 payments.

You also inquire about a trade debt that developed between MGL and Kortex, as it applies to shipments to the United States. You indicate that for two years, MGL paid approximately $14,455,316 to Kortex and has received in return approximately 10,548,703 meters of fabric. You indicate further that approximately 67% of that fabric was shipped to MGL in the United States, where the full duty was paid based upon the contract price negotiated in good faith between the parties. You state that the trade debt occurred because MGL paid Kortex
for fabric faster than Kortex was able to ship it. Although MGL was obligated to pay $1.10 per meter for shipments made to the United States, it often advanced additional funds to ensure that sufficient raw materials were available to meet its orders in a timely manner. Even though a July 19, 1995, statement by MGL's president offers what appears to be a somewhat different explanation for the trade debt, we have assumed that the facts are as stated.

You indicate that as of October 1, 1995, Kortex had accrued a trade debt to MGL of approximately $3,000,000. In order to repay the debt, the parties have agreed to sign a contract for 10,000,000 meters of fabric at $1.50 per meter, but MGL will actually pay Kortex only $1.30 per meter until the trade balance is repaid. It is intended that the trade debt will be paid off during the next sixteen months, as MGL is currently importing about 1,000,000 meters of fabric per month. Although MGL is only paying $1.30 per meter for the fabric, it still proposes to declare the $1.50 per meter contract price to Customs for all shipments made to the United States.


Whether MGL's $220,100 payment to Kortex for the purchase of Kortex's stock is included in price actually paid or payable of the imported fabric?

Whether the $1.50 invoice price represents the price actually paid or payable for the imported merchandise?


As you are aware, 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 merchandise when sold for exportation for the United States," plus certain enumerated additions. The term "price actually paid or payable" is defined in section 402(b)(A) of the TAA as:

...the total payment (direct or indirect...) made, or to be made for imported merchandise by the buyer to, or for the benefit of, the seller.

However, imported merchandise is appraised under transaction value only if the buyer and seller are not related, or if they are related, the transaction value is deemed acceptable. Section 402(b)(2)(B) of the TAA provides that a transaction value between a related buyer and seller is acceptable if the circumstances of sale indicate that the relationship did not influence the price actually paid or payable. Alternatively, a transaction value between related is acceptable if it closely approximates, inter alia, the deductive or computed value (test values) for identical or similar merchandise. 19 U.S.C. 1401a(b)(2)(B).

We note that MGL has purchased a controlling interest in Kortex, and therefore the buyer and seller are related parties. Accordingly, the following analysis is applicable only if the transaction value is deemed to be the acceptable method of appraisement for the imported merchandise. In view of the fact that MGL made payments to Kortex above the purchase price of the imported merchandise, this issue needs to be looked at closely. We note that we have no evidence to support the acceptability of transaction value.

With respect to the $220,100 payment, based on copies of the contracts and the wire transfers, if transaction value is the acceptable method of appraisement, we are satisfied that the payments were made for the purchase of Kortex's stock and did not relate to the purchase of imported merchandise. Accordingly, these payments are not part of the transaction value of the imported merchandise and are not dutiable.

Turning to the second issue, you indicate that MGL will be reimbursing Kortex for the merchandise a lower amount than is shown on the invoices in order to make up for a trade debt that it is owed. Nonetheless, MGL proposes to declare the $1.50 per meter contract price to Customs for all shipments. We agree that the invoice price represents the price actually paid payable for the imported merchandise. As stated above, the price actually paid or payable for imported merchandise is the total payment, whether direct or indirect, by the buyer to the seller. In Headquarters Ruling Letter (HRL) 543766, dated September 30, 1986, Customs ruled that a credit 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. The importer was owed a credit as a result of problems with prior shipments. The credit was applied against a later shipment. We ruled that the "overpayment" on the initial shipment constituted an indirect payment for later shipments. See also HRL 543830 dated November 7, 1986.

In this instance, in order to recoup the debts that it is owed for overpayments from prior shipments, the importer will be furnishing a lower amount to the overseas supplier than is shown on the invoices. Under these circumstances, the difference in the invoice price and the actual payments is includable in the transaction value as indirect payments. In other words, the importer sends the supplier, $1.30 per meter, which is less than the total price of the goods. The remaining amount ($.20) is offset against your client's credit with the manufacturer. Accordingly, the full amount ($1.50) you are proposing to declare to Customs and to explain on the commercial invoices is an acceptable calculation of the price actually paid or payable, even if the actual payments to the overseas supplier are lower. See HRL 544425, dated February 23, 1990.


Assuming transaction value is an acceptable method of appraisement, MGL's $220,100 payment for the purchase of Kortex's stock is not includable in the transaction value of the imported merchandise. The price actually paid or payable for the imported merchandise is represented by the $1.50 invoice price, comprised of a direct and an indirect payment.


Acting Director,
International Trade Compliance Division

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