HQ 544580: Dutiability of "Interest" Payments

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 544580

                          March 1, 1991

VAL CO:R:C:V  544580 VLB

CATEGORY: Valuation

District Director of Customs
10 Causeway Street
Boston, Massachusetts 02222

RE: Dutiability of "Interest" Payments

Dear Sir:

     This is in response to your memorandum (ENT-3-0:RA EJS)
dated August 8, 1990, forwarding a Request for Internal Advice on
the dutiability of payments made by BASF Corporation Information
Systems (hereinafter referred to as "the importer") to its
supplier BASF AG of Ludwigshafen, Germany (hereinafter referred
to as "the seller").


FACTS:

     As you know, the issue of the dutiability of purported
interest payments made by the buyer to the seller arose out of an
audit conducted by Customs in 1987.  At that time, the Regulatory
Audit personnel in the Northeast Region requested internal advice
on the dutiability of the payments. 

     On December 16, 1988, Customs issued Headquarters Letter
Ruling (HRL) 544155.  In the HRL, we held that the the importer
payments to the seller met the requirements of T.D. 85-111, which
at the time was the only applicable statement by Customs on
determining the dutiability of payments that were allegedly
interest payments.

     Subsequently, on July 17, 1989, Customs published a
Statement of Clarification for T.D. 85-111 (54 FR 29973) ("the
Clarification").  In the Statement of 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, which was
ninety days after the Clarification was published in the Federal
Register.
                              - 2 -

     By letter dated August 15, 1989, counsel for the importer
stated that the importer was concerned about the impact of the
Clarification on HRL 544155.  Counsel requested that Customs
"confirm in writing that the Statement of Clarification does not
in any way alter the effectiveness of the ruling".  Counsel
subsequently withdrew this request before Customs ruled on the
issue.

     
ISSUE:

     Whether the Statement of Clarification for T.D. 85-111
applies to the importer's entries on or after October 16, 1989.


LAW AND ANALYSIS:

     Counsel for the importer contends that "[t]here have been no
changes in the operative facts or controlling law which would
justify a departure from the decision taken in [HRL] 544155".  In
addition, counsel states that its reading of the Statement of
Clarification indicates that the Clarification was not intended
to replace or supersede the criteria coverning the dutiability of
interest charges, as published in T.D. 85-111.  Finally, counsel
asserts that there is nothing in the Statement of Clarification
indicating that Customs intended to modify or revoke the decision
in HRL 544155 on the dutiability of the importer's payments to
the seller.

     Under 19 CFR 177.9(d), any ruling letter that is not in
accordance with the current view of the Customs Service may be
modified.  The modification is effected by Customs Headquarters
giving notice to the person to whom the ruling letter was
addressed, in this case the Deputy Assistant Regional
Commissioner for the Northeast region, and if necessary, by the
publication of a statement in the Customs Bulletin.

     In this case, the publication of the Statement of
Clarification provided notice that Customs would require
specified evidence from importers who are claiming a deduction
under T.D. 85-111.  In HRL 544155 Customs did not address the
Clarification because the Clarification had not been issued. 
Therefore, HRL 544155 is not in accordance with the current view
of the Customs Service and must be modified to encompass the
applicability of the Clarification.  
                              - 3 -

     As a result, the question of whether the importer meets the
evidentiary requirements set out in the Clarification must be
examined.  As previously discussed, under the Clarification ,
bona fide interest payments are considered to be payments that
are carried on the importer's books as interest expenses in
conformance with generally accepted accounting principles.

     The importer in this case does not book the payments to the
seller as interest expenses.  Therefore, the importer does not
meet the evidentiary requirements that are set out in the
Clarification.  This approach is analogous to the Customs
treatment of buying commissions.  An importer can declare that it
has bona fide buying commissions that should not be included as
part of the price actually paid or payable.  However, if
requested, the importer must produce an invoice or other
documentation from the foreign seller to the agent that
establishes that the agent is not the seller and that the
payments are bona fide buying commissions.  If the importer
cannot meet the evidentiary requirements, then the purported
buying commissions are not considered to be bona fide buying
commissions.

     As previously discussed, 19 CFR 177.9(d) contains the
provisions for the modification or revocation of ruling letters. 
Under 19 CFR 177.9(d)(2) the modification or revocation of a
ruling letter cannot be applied if certain conditions are
present.  One of the conditions is that the ruling was originally
issued with respect to a prospective transaction.  In this case,
HRL 544155 was not issued with respect to a prospective
transaction.  Rather, HRL 544155 was internal advice that was
issued to the Deputy Assistant Regional Commissioner for the
Northeast Region with respect to completed transactions.
   
     The importer was clearly on notice of this evidentiary
requirement contained in the Clarification, given the fact that
its counsel submitted a letter inquiring about the impact of the
Clarification on the importer's transactions.  However, the
importer chose to withdraw its request that Customs rule on the
applicability of the Clarification before Customs could rule.  

     In sum, HRL 544155 is modified to include the application of
the Clarification as discussed in this letter.  The modification
is effective as of October 16, 1989.
                              - 4 -



HOLDING:

     The Statement of Clarification for T.D. 85-111 applies to
the importer's entries on or after October 16, 1989.  HRL 544155
is modified to incorporate the application of the Statement of
Clarification.



                              Sincerely,



                              John Durant, Director
                              Commercial Rulings Division