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HQ 545277

June 14, 1993

VAL CO:R:C:V 545277 ILK


Special Agent in Charge
Mobile, Alabama 36604

RE: Internal Advice request regarding inclusion of interest payments in the price actually paid or payable; your reference INV 8-02 E:S:MO CLG

Dear Sir:

This is in response to your internal advice request dated April 12, 1993 pertaining to transactions between Gold Star of America, Inc. (GSAI), a U.S. corporation and Lucky-Goldstar International Corporation (Lucky), a Korean corporation. You requested our determination regarding the inclusion of certain interest payments made by GSAI in the dutiable customs value of the imported merchandise.


According to Customs Audit Report No. 5-89-CEF 002 dated November 18, 1988, GSAI and Lucky are related parties. The audit covers GSAI's entries of merchandise filed from July 1, 1982 through December 31, 1986. GSAI is in the business of the production, manufacture, distribution, exportation and sale of color televisions and electronic home appliances. Lucky is GSAI's major supplier of electronic components. The audit found that agreements between GSAI and Lucky provide for GSAI's payment for the imported merchandise 180 days after the invoice date. The terms on the invoice were "D/A Interest/Buyers Account" from December 1983 through March 1986 and "D/A Interest/Sellers Account" from April 1986 through March 1987.

According to a letter dated March 16, 1993, written on behalf of GSAI, a "D/A" contract or arrangement is a "documents against acceptance" financing arrangement. The March 16 letter explains that the D/A arrangement works as follows:

1. GSAI and Lucky contract for the purchase of goods. The contract provides that payment is to be "by 180 days D/A after sight with interest at buyer's account." A D/A Contract was provided as an exhibit. The D/A contract does not include any specific interest amount and does not provide any interest rate or guide to determining the interest rate.

2. When Lucky ships the merchandise under the contract it prepares a Certificate which shows the contract no., model no. of units shipped, quantity of units shipped and the invoice price of the shipment. The Certificate does not include any reference to the D/A interest. The document certifies that the 2nd and 3rd original bill of lading were mailed by registered mail to the "accountee" at the time of shipment. Lucky also prepares a statement of D/A interest which shows the amount of interest payable from the date of shipment at the discount rate of interest currently quoted by Korean banks. The statement of D/A interest states "[i]n accordance with terms and conditions of our contract, we duly draw upon you the above mentioned D/A interest at the rate of 8.54%..." and identifies the drawer as Lucky. Additional documents consist of a commercial shipping invoice and an Intermodal Bill of lading. The commercial shipping invoice contains the invoice price for the merchandise, and does not refer to interest.

3. Lucky draws a draft against GSAI payable to the Korean bank for the total amount of the invoice price and the D/A interest, payable a specified number of days after the shipment date. The exhibit provided specifies 180 days, and specifies payment to the order of Citibank in Seoul, Korea.

4. After shipment, Lucky sells the shipment documents, Certificate, Statement of D/A interest and the draft against GSAI to a Korean bank with which it has an ongoing business relationship and sells the documents at a discount equal to the discount rate currently quoted by Korean banks. Lucky receives the discounted amount which is equal to the invoice price set forth in the contract, the shipping invoice and the Certificate. This amount does not include the D/A interest. The Korean bank issues a copy of a discount transaction receipt which shows the interest component.

5. The Korean bank forwards all of the documents received from Lucky to its U.S. collecting bank, which in turn forwards them to GSAI for acceptance. The exhibit provided indicates that Citibank, N.A. acts as the U.S. collecting bank. The collecting bank is paid a fee for its services in forwarding documents and collecting payments on accepted drafts.

6. GSAI examines the documents and, if satisfied, signs the draft, which is then payable by GSAI at maturity, and returns it to the collecting bank. GSAI retains the shipping invoice and bill of lading to establish title to the goods.

7. At this stage the Korean bank (or someone to whom the bank sells the accepted draft) owns the right to payment from GSAI for the invoice price of the imported merchandise, plus interest to the date of maturity of the draft, in the amount set forth in the Statement of D/A interest.

8. On the maturity date GSAI pays to the Korean bank (or one to whom the accepted draft has been sold by the Korean bank) the amount of the draft, which represents the purchase price plus interest thereon from the date of the Korean bank's advance until maturity. GSAI may pay through the collecting bank by depositing funds to cover the amount of the draft or by the collecting bank's debiting GSAI's account with the collecting bank. The amount debited from GSAI's account or paid by GSAI includes the collecting bank's fee.

According to the March 16, 1993 letter, GSAI records the interest payment on its books as interest expense in accordance with generally accepted accounting principles (GAAP). The letter and the General Security Agreement Relating to Goods ("Security Agreement") included as an exhibit state that Lucky agrees to pay to the negotiating bank, on demand, all drafts it negotiates which are not paid by the drawee, GSAI in this case, at maturity. The importer's 1993 letter states that the interest was paid to Korean banks, not to Lucky. However, a letter dated March 31, 1987 written on behalf of GSAI states that the Gold Star parent "charged a much lower interest rate than [GSAI] would have been able to obtain from a U.S. banking institution." The Customs Report of Investigation dated October 8, 1992 includes a copy of a transaction history retrieved from Citibank's records. A page entitled "collection inquiry data" shows that the total amount paid by GSAI as the invoice price plus interest. A second page entitled "collection inquiry- parties for" indicates with respect to the amount collected "pay to Lucky Gold Star."

Customs obtained copies of a D/A Contract dated July 22, 1989 and an August 1, 1989 amendment to that contract. The amendment changed the payment terms from "60 days D/A after sight with interest buyer's account" to "60 days D/A after sight with interest seller's account." Customs' investigation determined that this type of amendment occurred on a regular basis. However, Customs was not able to obtain any information as to the significance of the change in terms. Customs also obtained a debit note dated August 7, 1989 naming Lucky as the drawer, which states "[i]n accordance with terms and conditions of this letter of credit, we duly draw upon you the above mentioned interest at the rate 10.5% annual...." The contract referred to was the same one for which the payment term was amended as described above, however it is referred to as an L/C No. (Letter of Credit) as opposed to D/A No. The accompanying invoice refers to "D/A 60 days".

According to GSAI, the parties have entered into this D/A arrangement because as a newly-formed U.S. company, the only way GSAI would have been able to obtain traditional letter of credit financing from U.S. banks would have been for Lucky to guarantee repayment of any draws made against the issuing bank. In order to guarantee GSAI's obligations, Lucky would have had to obtain the approval of the Korean government, which according to GSAI is a time-consuming and cumbersome process. It is GSAI's position that the interest payments were not made to or on behalf of Lucky, however, even if they were, the interest would not be dutiable because the sales contract and Statement of D/A interest, together with the actual practice of the parties demonstrate an overall financing arrangement. According to the audit report, Customs' received no responses to its requests for written financing agreement documentation, and Customs' audit did not disclose anything that would indicate that GSAI's payments for interest were part of an overall financing arrangement.

It is your offices belief that the interest payments are being made to date. You have requested us to determine whether the interest payments are to be included in the dutiable customs value of the imported merchandise from July 1, 1982 to the present.


Whether the interest payments made by the importer, GSAI, are part of the dutiable customs value of the imported merchandise.


Transaction value, the preferred method of appraisement, is defined in §402(b)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (19 U.S.C. 1401a(b); TAA) as the "price actually paid or payable for the merchandise" plus amounts for the five enumerated statutory additions in §402(b)(1). The parties are related, therefore pursuant to §402(b)(2)(B) of the TAA, transaction value is acceptable only if an examination of the circumstances of the sale indicates that the relationship between GSAI and Lucky did not influence the price actually paid or payable or if the transaction value of the imported merchandise closely approximates the transaction value of identical or similar merchandise in sales to unrelated buyers in the U.S. or the deductive or computed value for identical or similar merchandise. We do not have enough information to determine whether transaction value is an acceptable basis of appraisement in this case, however, for the purpose of this response, we are assuming that transaction value is the appropriate basis of appraisement.

Customs has issued T.D. 85-111 dated July 17, 1985, which states that interest payments, whether or not included in the price actually paid or payable for imported merchandise, shall not be regarded as part of the customs value provided that:

(a) The charges are distinguished from the price of 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 transactions prevailing in the country where, and when the financing was provided.

T.D. 85-111 is to apply whether the financing is provided by the seller, a bank or another natural or legal person, and if appropriate, where the merchandise is valued under a method other than transaction value. The effective date of T.D. 85-111 was April 25, 1985.

Subsequently, on July 17, 1989, Customs published a Statement of Clarification for T.D. 85-111 (54 FR 29973) (the "Clarification"). In the Clarification, Customs stated that for 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 further 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." The Clarification became effective on October 16, 1989, 90 days after its publication in the Federal Register.

Prior to the issuance of T.D. 85-111 it was Customs' position that only those interest payments which were part of an "overall financing arrangement," or those which were paid by a buyer to a third party unrelated to a seller and which did not accrue to the seller's benefit, were not dutiable. See TAA No. 31 dated June 11, 1981, TAA No. 43 dated December 17, 1981.

In this case, in light of the dates of the subject transactions, we have three different sets of guidelines under which we need to determine whether the interest payments made by GSAI are included in the price actually paid or payable for the imported merchandise. The three time periods are July 1, 1982 through April 24, 1985, April 25, 1985 through October 15, 1989 and October 16, 1989 to the present. This ruling assumes that the manner of interest payment from 1982 to the present follows the procedure outlined in paragraphs 1-8 above.

July 1, 1982 through April 24, 1985

With respect to these transactions, we must determine whether the interest payments were paid to a third party unrelated to Lucky, or if they were not, whether they were part of an overall financing arrangement.

The term "price actually paid or payable" is defined in TAA §402(b)(4)(A) 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.(Emphasis added).

Title II of the Statement of Administrative Action of the TAA provides that one example of an indirect payment to a seller would be "the settlement by the buyer, whether in whole or in part, of a debt owed by the seller." In this case, it appears that the credit extended by the Korean bank was to Lucky, although GSAI benefitted from the extension of credit. According to the Security Agreement between Lucky and the Korean Bank, if GSAI were to fail to pay the draft to the collecting bank upon maturity of the draft, Lucky would be responsible for payment of the draft amount, including the interest amount, to the Korean bank. In the March 16, 1993 letter, this arrangement is compared to that of a guaranty. As the credit is extended to Lucky, payment for the amount of the credit is ultimately the obligation of Lucky. Further, there is no question that the payments of the invoice price, which are also paid by GSAI to the collecting bank, are payments to Lucky.

Therefore, assuming the transactions occurred as described in paragraphs 1-8 above, GSAI's payment of the invoice amount and interest are indirect payments to Lucky, and are part of the price actually paid or payable for the imported merchandise. Other documents support a finding that the interest payments are payments to Lucky. The statements of D/A interest and the debit note indicate that Lucky draws the interest upon GSAI, the March 31, 1987 letter written on behalf of GSAI indicates that the interest rate is charged by a GSAI parent, and Citibank's transaction history indicates that the amount it collects is to be paid to Lucky.

As we have determined that the interest payments are payments to Lucky, we must also determine whether the interest payments are part of an overall financing arrangement between GSAI and Lucky. Customs found the existence of an overall financing arrangement in TAA No.43 and Headquarters Ruling Letter (HRL) 542869 dated October 13, 1982. In both cases the financial arrangements could be equated with a revolving charge account system in that interest payments were calculated from the outstanding balance due the foreign supplier for previously-imported shipments. Another relevant factor was that in both cases the extension of credit by the foreign suppliers enabled the importers to avoid the need to seek alternate inventory financing sources. In addition, as the overall financial arrangement in each case was designed to permit the buyer to delay its payments with respect to all transactions between the parties, the separate undertaking clearly did not relate to any one particular sale. In TAA No. 43 and HRL 542869 there was a separate credit arrangement between the parties. In HRL 542869, the credit arrangement was documented in the form of a signed contract.

In the instant case, by means of the D/A interest process, the interest is paid by GSAI separately for each shipment. Each instance of financing is a separate transaction relating to a particular sale. Unlike in TAA No. 43 and HRL 542869, GSAI does not appear to have an account with Lucky on which it is charged interest, because Lucky is paid the invoice amount by the Korean bank. In this case, there is no separate agreement relating to financing, and no agreement specifies any rate of interest. According to GSAI, the rate of interest is that quoted by Korean banks. The interest rate is determined separately with respect to each sale. Based on the foregoing, the financing in this case is not pursuant to an overall financing agreement, and therefore the interest payments are part of the price actually paid or payable for the imported merchandise.

April 25, 1985 through October 15, 1989

With respect to these transactions, we must determine whether the interest payments, which we have determined to be indirect payments to Lucky, meet the criteria set forth in T.D. 85-111, which are listed above. The facts provide no indication that the transactions are handled any differently in view of the variation from a D/A contract to an L/C contract, and the changing of the terms to charge the interest to the seller's account as opposed to the buyer's account.

One of the requirements is that the financing arrangement be made in writing. In this case, the only documentation of the financing is the D/A invoice and the statement of D/A interest prepared by Lucky and included with the purchase documentation. The D/A invoice does not contain any interest rate or guide for determining the interest rate. These documents alone do not constitute a written financing arrangement as required by T.D. 85-111. As this requirement of T.D. 85-111 is not met, it is not necessary to determine whether the remaining requirements are met. The interest payments are to be included in the price actually paid or payable for the imported merchandise.

October 16, 1989 to the present

As with the prior transactions, we have determined that the interest payments are indirect payments to Lucky. The requirements of T.D. 85-111 must be met in addition to those set forth in the Clarification. The transactions within this time period do not meet the requirement of a written financing agreement for the same reasons as set forth above. Therefore, the interest payments are to be included in the price actually paid or payable for the imported merchandise.


The interest payments made by the importer to the Korean bank are indirect payments to the seller, they are not part of an overall financing arrangement, or provided for in a written financing agreement, therefore they are to be included in the price actually paid or payable for the imported merchandise.


John Durant, Director
Commercial Rulings Division

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