HQ 544644: Application for Further Review of Protest No. 1303-90-000056; Dutiability of Value Added Tax Refunded After Exportation by Government Authorities

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                            HQ 544644

                       September 29, 1993

VAL CO:R:C:V  544644 DPS

CATEGORY:  Valuation

District Director
Baltimore, Maryland

RE:  Application for Further Review of Protest No.
     1303-90-000056; Dutiability of Value Added Tax Refunded     
After Exportation by Government Authorities

Dear Sir:

     The subject application for further review was filed against
your decision regarding the appraisement of trucks and components
the importer/protestant, Caterpillar Inc. (Caterpillar), purchases
from Artix Limited (Artix), an unrelated British corporation.  The
issue raised by this protest is the dutiability of certain "value
added tax" (VAT) payments which are included in the total payment
from the buyer to the seller.  Various meetings with counsel and
OR&R staff were held and numerous submissions by the importer's
counsel were made, the most recent of which was July 22, 1993.

FACTS:

     Caterpillar purchases trucks and truck components from Artix. 
Pursuant to its agreement with Artix, Caterpillar acquires title
to the trucks while they are still located in the United Kingdom,
where they remain warehoused in Artix inventory until their
shipment to the United States.  Counsel notes that estimating the
average time in inventory of the subject merchandise is difficult. 
Prior to April 1990, most trucks were shipped very soon after
manufacturing.  More recently, however, as a result of the
recession, Artix's inventory levels have been averaging
approximately four to five months.  

     Because the merchandise is not immediately exported after
manufacture, Artix is required by the British tax authority to pay
the VAT on all goods sold to Caterpillar which are stored in the
U.K., notwithstanding that all such goods will be exported to the
U.S.  On the commercial invoices covering the sale of the goods,
the VAT is itemized separately.  Caterpillar pays the invoiced
total which includes an amount for VAT.  After exportation of the
goods from Britain, Caterpillar files a notice with the British tax
authority, and, on a routine basis, receives a full refund of all
VAT payments directly from the governmental tax authority.  

     According to Caterpillar's counsel, under the British tax
system, Caterpillar is not permitted to pay the VAT directly to
the government or obtain refunds prior to exportation.  Counsel
has also indicated that Artix, the British manufacturer, is in no
way involved with either the filing for the refund, or with its
receipt.  Furthermore, attempts to obtain the refund prior to
export have been unsuccessful, as have efforts to have Caterpillar
pay the VAT initially.

     With regard to the protested entries, Customs has taken the
position that the VAT charge is dutiable since it is part of the
price actually paid or payable for the merchandise when sold for
exportation to the U.S., and that Customs has no statutory
authority to deduct it under transaction value.   The District also
cited   402(b)(4)(B) of the TAA, as well as a Headquarters ruling
interpreting that provision, to support its position that the
statute requires Customs to disregard the post-importation refund
of VAT. 

     Caterpillar protests Customs' refusal to allow it to treat
the VAT as nondutiable.  It claims that VAT is not part of the
"price actually paid or payable" for goods purchased from Artix,
and does not form part of the value of the goods.  Protestant
argues that  402(b)(4)(B) does not cover the VAT refund because it
does not constitute a rebate or price decrease, rather the refunds
come from the British government, and are not negotiated after
exportation but anticipated at the time of sale.  In addition,
Caterpillar asserts that Article VII, Section 3 of the General
Agreement on Tariffs and Trade (GATT) prohibits the imposition of
import duties upon internal taxes from which the
imported goods have been exempted or relieved by means of a refund.

ISSUE:

     Whether the amount for VAT, which, under the circumstances,
is included in the price paid by the importer to the seller, and
subsequently refunded by the foreign governmental authority to the
importer after exportation to the U.S., is considered part of the
price actually paid or payable for the imported merchandise. 

LAW & ANALYSIS:

     Based on statements by the protestant, the parties to the
subject transactions are not related.  Absent information to the
contrary, for the purpose of this decision, we assume that
transaction value is the proper method of appraisement.

     Transaction value is defined in section 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 term "price actually paid or payable" means the 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.

 402(b)(4)(A) of the Tariff Act of 1930 as amended by the TAA.   

     Based on information provided by Caterpillar, Caterpillar pays
the invoice price to Artix.  That price includes an amount for VAT. 
When asked why the merchandise is stored in the U.K. rather than
exported immediately (in which case the merchandise would not be
subject to VAT), Caterpillar cited business purposes, and explained
that providing funds to Artix for payment of the VAT was a method
of helping Artix with its cash flow.  
     
     In support of its position, protestant argues that the VAT is
not part of the "price actually paid or payable" for the goods
purchased from Artix.  It further disputes the rationale utilized
in a previous Headquarters ruling, 543435MK of January 15, 1985.
In June, 1988, Customs in Jacksonville relied on 543435 when it
rejected Caterpillars's position that the VAT payment is not
dutiable.  The ruling cited  402(b)(4)(B) of the TAA.  That section
provides:

     Any rebate of, or decrease in , the price actually paid
     or payable that is made or otherwise effected between
     the buyer and seller after the date of the importation
     of the merchandise into the United States shall be
     disregarded in determining the transaction value under
     paragraph (1). 

The ruling relied on the above provision to hold:

     ...with regard to any merchandise for which you paid a
     sum which included a VAT and for which you received a
     refund subsequent to the date you imported the
     merchandise, the transaction value would be the price
     you actually paid, inclusive of VAT.  

Caterpillar argues that  402(b)(4)(B) of the TAA does not apply to
their situation because: (1) the VAT payments were not made 

for the goods by the buyer to, or for the benefit of the seller,
and as such do not constitute part of the "price actually paid or
payable;" (2) the payments, although made to Artix, are immediately
forwarded to the British tax authority and should not be
characterized as payments for the goods; and (3) the VAT payments
made by Caterpillar are clearly not made for the benefit of Artix,
but rather the British tax authority -- Artix derives no benefit
from the VAT payments.  

     With regard to the rebate provision, protestant asserts two
additional reasons why the VAT refunds should be excluded from the
dutiable value of the goods purchased from Artix.  First, the
language of the rebate provision,  402(b)(4)(B), addresses a
subsequent rebate or decrease in price effected between buyer and
seller.  Here, no rebate has been effected between the buyer
(Caterpillar) and the seller (Artix).  Instead, Caterpillar has
received a refund from the British tax authority.  

     Second, Caterpillar believes that a reasonable interpretation
of the rebate provision supports the conclusion that the refund of
the VAT payments is not a rebate under  402(b)(4)(B) because this
provision was meant to proscribe price rebates or decreases not
agreed upon or negotiated until after importation.  Such a reading,
Caterpillar argues, accords with other parts of the value code,
which make it clear that transaction value can be based on pricing
formulas, even if the actual figures are not known at time of
entry, so long as agreement is reached between the parties prior
to importation.  In the case of VAT payments, it is known long
before importation that they will be refundable.

     While counsel raises interesting points, the arguments are
not persuasive to the extent we should disregard the critical fact
that an amount for VAT is part of the price actually paid by the
buyer, Caterpillar, to the seller, Artix.   Here, pursuant to the
statutory definition of transaction value ( 402(b)(4)(A) set forth
at page 3 herein), the entire payment, inclusive of VAT, makes up
the price actually paid or payable.  The statutory deductions, set
forth in  402(b)(3), and the exclusions in  402(b)(4)(A) do not
allow for a deduction of the VAT from transaction value.  Our
authority to deduct certain costs from transaction value is
restricted to those items specified in the provisions of the
statute. 
     Protestant asserts that the VAT is not part of the negotiated
price between the parties.  Nevertheless, it appears as an element
of price which is paid by the buyer to the seller.  While we
recognize that the rebate is not effected between buyer and seller,
which may have the effect of limiting the impact of  402(b)(4)(B)
on this transaction, we cannot agree that the VAT is not part of
the price actually paid or payable in the instant transactions. 
In so finding, we rely on the Court of Appeals for the Federal
Circuit decision in Generra Sportswear Company v. U.S., 905 F.2d
377 (Fed. Cir. 1990), involving quota charges paid by the buyer to
the seller.  The court held that as long as the quota payments were
made to the seller in exchange for merchandise sold for export to
the United States, the payment properly may be included in
transaction value, even if the payment represents something other
than the per se value of the goods.  The court stated:  

     The focus of transaction value is the actual transaction
     between the buyer and the seller;  if quota payments were
     transferred by the buyer to the seller, they are part of
     transaction value.  That transaction value may encompass
     items other than the pure cost of the imported
     merchandise is reflected in section 1401a(b)(3),
     governing exclusions from transaction value.  If
     excludable costs are not identified separately from the
     price actually paid or payable, they are included in
     transaction value.

Generra Sportswear Co. v. U.S. at 380.  In so holding, the court
recognized that if Congress had intended to exclude quota charges
from transaction value, it could have included them among the
explicit exclusions enumerated in  402(b)(3).  Likewise, under the
present circumstances, if Congress had intended to exclude refunded
VAT payments from transaction value, it would have done so.  The
value statute does, in fact, exclude refunded internal taxes
imposed by the country of exportation from certain cost elements
of computed value.  See  402(e)(2)(A) of the TAA, 19 U.S.C.
 1401a(e)(2)(A).  Had Congress intended, it could have also
excluded such internal taxes, refunded upon exportation, from
transaction value.  It did not include such language in the law.

     The Generra court further recognized that when the payment is
made to the seller, it is not necessary to determine whether the
seller benefited because the statute is written in the alternative:
"to, or for the benefit of, the seller." 19 U.S.C.  1401a(b)(4)(A). 
Accordingly, we need not determine whether the seller benefitted
from having the buyer pay a price which included an amount
sufficient to cover the VAT.  The fact is, an amount inclusive of
VAT was paid to the seller.

     Another relevant point made by the Court of Appeals for the
Federal Circuit in Generra, focuses on the efficiency of Customs'
appraisement procedure.  It noted that Congress did not intend for
the Customs Service to engage in extensive fact-finding to
determine whether separate charges, all resulting in payments to
the seller in connection with the purchase of imported merchandise,
are for the merchandise or for something else.  
In Generra, the court reiterated its view expressed in Moss Mfg.
Co. v. U.S., 896 F.2d 535, 539 (Fed. Cir. 1990), that the
"straightforward approach [of section 1401a(b)] is no doubt
intended to enhance the efficiency of Customs' appraisal procedure;
it would be frustrated were we to parse the statutory language in
the manner, and require Customs to engage in the formidable fact-
finding task envisioned by [appellant]."  Generra, supra. at p.
380.

     Protestant's argument that Customs interpretation of the value
statute conflicts with Article VII of the General Agreement on
Tariffs and Trade (GATT), specifically, section 3, is not
persuasive.  Customs has been delegated the authority to administer
 402 of the TAA (19 U.S.C.  1401a), which is the U.S. codification
of the Agreement on Implementation of Article VII of the GATT. 
More commonly referred to as the GATT Valuation Agreement, it
establishes a positive system of Customs valuation based on the
actual price of imported goods.  Customs obligation is to
administer  402 of the TAA (19 U.S.C.  1401a), not Article VII of
the GATT.  We believe our interpretation of the facts presented by
Caterpillar in the context of the subject protest    is consistent
with the plain language of the statute, and judicial
interpretations of the same.  The statute makes specific reference
to the treatment of refunded internal taxes in the context of
computed value ( 402(e)(2)(A) of the TAA, 19 U.S.C.
 1401a(e)(2)(A)), but does not address them in the context of
transaction value ( 402(b) of the TAA, 19 U.S.C.  1401a(b)).


A review of the legislative history by protestant's counsel as well
as Customs, revealed nothing concerning legislative history on the
issue.

     Finally, protestant's argument that pricing, payment and
refund arrangements between buyer, seller and government tax
authority are akin to a formula consistent with the statute and
regulations (19 CFR  152.103(a)(1)) is not persuasive.  The price
is settled prior to importation and includes an amount for VAT
which will be refunded by the governmental authority, provided the
buyer files the proper documents with the appropriate taxing
agency.  As such it is not adjusted between buyer and seller
pursuant to a formula.

     It is also important to note protestant's recognition in its
original protest papers that if the arrangement between
Caterpillar, Artix and the British tax authority were slightly
different, the VAT payments would not be necessary (if the
merchandise were immediately exported after manufacture) or even
dutiable (if the VAT payments were not made to the seller).


HOLDING:

     Consistent with the foregoing analysis, we find that the VAT
payments included in the price actually paid or payable by the
buyer to the seller, and refunded after importation by the foreign
governmental authority, are properly included in transaction value
because the statute provides no authority to deduct them. 
Accordingly, the subject protest is hereby denied.

     A copy of this decision should be attached to the Customs Form
19 and mailed to the protestant as part of the notice of action on
the subject protest.


                              Sincerely,



                              John Durant, Director
                              Commercial Rulings Division