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HQ 547395

November 21, 2001

RR: IT: VA 547395 LOR
547786 KDW


Port Director
U.S. Customs Service
O’Neill Building, Suite 603
10 Causeway Street
Boston, MA 02222-1059

RE: Decision on Application for Further Review (AFR) of Protest No. 0401-99-100100; Dutiability of Merchandise Subject to Retroactive Materials Price Adjustments

Dear Port Director:

This is in response to your memorandum dated May 26, 1999, concerning Protest No. 0401-99-100100, dated April 13, 1999, filed on behalf of Holmes Products Corporation (hereinafter “Protestant”) by counsel Sullivan and Lynch, PC, regarding additional payments made to manufacturers and buying agents. We regret the delay in responding.


Holmes Products purchases electrical home appliances such as humidifiers, air purifiers, and heaters composed of plastic compounds from related manufacturers such as Esteem and unrelated manufacturers such as Fair Glare, Ltd. This matter initially arose in 1997 as a Prior Disclosure filed by the Protestant with the Port of Boston concerning merchandise imported into the United States in 1995. The Prior Disclosure involved 1) the dutiability of U.S. origin compounds provided to manufacturers free of charge; 2) payments made by to related party buying agents; and 3) post importation price increases due to increased costs of materials used in the manufacture of the imported merchandise. The issues regarding the U.S. origin components provided to the manufacturers free of charge qualified for duty free treatment under HTSUS 9802.0080 and payments made to buying agents were found by you to be non-dutiable.

The only issue before us at this time is the additional payments made by Holmes Products to the manufacturers. In 1995, the price of materials in fans, primarily plastics, increased over the estimated price and Esteem and Fair Glare approached Protestant and requested price adjustments. Although under no obligation, Protestant provided additional payments in the amount of $2,807,588.67 to Esteem and $200,000.00 to Fair Glare in order to maintain good business relations.

Your office determined that additional payments made by the Protestant to the manufacturers are included in the price actually paid or payable for the imported merchandise and that the shipments should be appraised using the transaction value method.


Are the additional payments made by Holmes Products to its foreign manufacturers part of the price actually paid or payable?


As you are aware, merchandise imported into the United States is appraised in accordance with § 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 under the TAA is transaction value, defined as the “price actually paid or payable for the merchandise when sold for exportation to the United States.” 19 U.S.C. § 1401a(b)(1).

Transaction value is only acceptable, however, if the buyer and seller are not related, or if related, the circumstances of sale indicate that the relationship did not influence the price actually paid or payable, or the transaction value approximates certain test values. 19 U.S.C. § 1401a(b)(2)(A)-(B). In this case, you state that transaction value is acceptable under the circumstances, and we focus our analysis on the question of whether the post-importation payments to the manufacturers is included as part of the transaction value for the imported merchandise.

Pursuant to §402(b)(4) of the TAA, the term 'price actually paid or payable' is defined as, “the total payment (whether direct or indirect) 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). The Court of International Trade, in Generra Sportswear Company v. United States, held that so long as a payment is made “to the seller in exchange for merchandise sold for export to the United States,” it is included in the price actually paid or payable. 905 F.2d 377, 380 (Ct. Int’l Trade 1990). Further, the Court explained that it is irrelevant that whether the payment represents something other than the per se value of the goods. “The focus of transaction value is the actual transaction between the buyer and seller.” Id.

Based on the Generra decision, a presumption exists that all payments made, directly or indirectly, by a buyer to a seller, are part of the price actually paid or payable for the imported merchandise. The presumption may be overcome, however, if the payments are completely unrelated to the imported merchandise. See Chrysler Corporation v. United States, 17 CIT 1049 (September 22, 1993). Accordingly, in order to overcome the Generra standard, Holmes Products must show that the additional payments are completely unrelated to the imported merchandise.

Holmes Products asserts that the additional payments should be considered as unrelated to the imported merchandise since the increase in price occurred after importation. The submission states that no formal agreement dealing with material cost increases existed between Holmes Products and the manufacturers at the time of the sale. Further, counsel states that the parties negotiated the price of imported merchandise five months prior to the product season based on the factories estimate of material costs and overhead. As such, additional payments by Protestant in the amount of $2,807,588.67 and $200,000.00 to the manufacturers constitute retroactive price adjustments.

Based on the evidence submitted we find that the payments by Holmes Products to its manufacturers after importation are directly related to the imported merchandise. We note Exhibit IX “reconciliation and debit notices” indicate that the payments were made in relation to the imported merchandise, and that the parties contemplated an adjustment at the time of importation. The price increases are included in the negotiated pricing structure, and the importer has submitted no evidence to prove that the payments were not part of the price actually paid or payable. 19 C.F.R. §152.103(a) provides 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. The word “payable” refers to a situation in which the price has been agreed upon, but the actual payment has not been made at the time of importation...”

In the instant case, we find that the circumstances giving rise to the additional duties were considered in advance by the parties. As such, the retroactive price increase is included in the transaction value. Although the invoices submitted to Customs represent the original contract prices, the documentation submitted shows that prior to exportation the parties contemplated price adjustments in the event of a change in circumstances such as an increase in the cost of plastics and silicon. The contract between the parties, although not written, is evidenced by the parties’ subsequent conduct. It is clear from the reconciliation and debit notice that the increases were considered in the original pricing structure, and that the parties anticipated that adjustments to the price would be made retroactively to account for extra costs.

Further, we note that the documentation regarding other aspects of the sale indicate that the parties anticipated adjustments after importation. §5 of the buying agency agreement between Holmes USA and Holmes FE and supporting documentation for a July 7, 1998, submission, support the finding that price adjustments should be considered part of the price actually paid or payable for the merchandise. §5 of the agreement provides:

(a). In consideration for its services to Holmes USA in pursuance of this Agreement, Holmes USA shall pay to Holmes FE a commission of three percent (3%) of the purchase price of products (calculated FOB Taiwan/Hong Kong) purchased by Holmes USA under the contracts and which shall have been inspected and found acceptable by Holmes FE as aforesaid.

(b) The commission described in (a) shall be subject to annual adjustment (i) and (ii) retroactively to account for extraordinary costs incurred which were not built into the original cost structure of the products or contracts.

Thus, the implication is, that the underlying contract anticipates costs not built into the original cost structure, and considered part of the purchase price of the subject merchandise. It would be inconsistent for Customs to consider the applicability of the agreement in establishing a buying agency relationship and then to discount its applicability with respect to price adjustments.

Further, the material price adjustment from the buyer was clearly intended to benefit the manufacturer/seller. Page seven of the Price Waterhouse memorandum includes a comparison of Esteem’s gross profit pre-adjustment and post adjustment. Without the approximately $2.9 million price adjustment, Esteem’s price does not include a profit. In fact, the fans would have been sold at a 5.34 percent loss instead of a 1.5-percent profit.

A statement on page 8 of the Price Waterhouse report also indicates that both Holmes USA and Esteem were aware that the materials price adjustment would result in an increase in Customs duties due to the increased purchase price. Paragraph two of Implementation section states, “In addition, per David Dusseault, Holmes will accrue approximately $150,000 ($2.9M* 4.7%) in customs charges on the increased purchase price. However, this is an adjustment for Holmes only and will not impact Esteem’s transfer price.”

Considering the documentation, we find evidence that the original contract between Holmes Products and the manufacturers indicates that the additional payments are linked to the imported merchandise. The additional payments by Holmes Products to its foreign manufacturers are for the materials used in fans imported into the United States. As such, these payments relate to the imported goods, and pursuant to Generra, they are part of the price actually paid or payable.


Protestant’s payments to the manufacturers representing retroactive material price adjustments are considered to be part of the price actually paid or payable for the imported merchandise. Therefore, this protest is DENIED.

This protest should be administered as set forth above. In accordance with §3A(11)(b), Customs Directive 099 3550-065, dated August 4, 1993, this decision should be mailed by your office to the protestant no later than sixty days from the date of this letter. Any reliquidation of the entries in accordance with this decision must be accomplished prior to the mailing of the decision. Sixty days from the date of the letter the Office of Regulations and Rulings will take steps to make the decision available to Customs personnel via the Customs Ruling Module in ACS, and to the public via the Diskette Subscription Service, the Freedom of Information Act and other public access channels.


Virginia L. Brown
Chief, Value Branch

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