HQ 544060: Ruling Request Regarding Foreign Currency Exchange Options

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 544060

                                        January 30, 1989

          CLA-2 CO:R:C:V  544060 EK

          CATEGORY:  Valuation

          Steven H. Becker, Esq.
          Coudert Brothers
          200 Park Avenue
          New York, New York  10166

          RE:  Ruling Request Regarding Foreign
               Currency Exchange Options

          Dear Mr. Becker:

                This is in reference to your ruling request submitted on
          behalf of your client (hereinafter referred to as importer).  For
          purposes of this ruling request, we are assuming that transaction
          value pursuant to section 402(b) of the Tariff Act of 1930, as
          amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C.
          1401a(b)), is applicable as a method of appraisement.  The
          importer is not related to the seller within the meaning of
          section 402(g) of the TAA.


          FACTS:

                The importer plans to import merchandise from an unrelated
          Hong Kong manufacturer.  Japanese piece goods will be purchased
          by the manufacturer and used in producing the merchandise.  The
          piece goods will be selected by the importer at the time the
          agreement is reached between the importer and the manufacturer
          for the purchase of the finished product.  The agreement between
          the parties will indicate a price, in U.S. dollars, of the piece
          goods and will establish a fixed price to the importer for the
          finished merchandise.  The agreement further provides that if at
          the time of the purchase of the piece goods there has been an
          increase to the seller necessary to purchase the piece goods,
          then the increased cost may be passed on to the importer.

                In order to protect itself against an increase in the value
          of the yen as against the dollar, the importer intends to
          purchase foreign currency exchange options which permits the
          holder to buy, during a set period or specific date, a certain

















                                        - 2 -


          amount of Japanese yen at a fixed U.S. dollar price.  Upon
          purchase of these options, the importer has the choice of one of
          two alternative scenarios.

                In this first situation, the importer will transfer the
          options to the seller pursuant to a written "exercise agreement"
          whereby the importer would, at the request of the seller,
          exercise the options by collecting from the seller and
          transmitting dollars to the bank.  In return, the importer would
          obtain from the bank and transfer to the seller the amount of yen
          due under the options.

                Regarding the second scenario, the importer omits the
          transfer of the options to the seller altogether.  Rather, to the
          extent necessary to insure that the yen/dollar exchange rate
          remains fixed at the level necessary to guarantee the maintenance
          of the piece goods price, the importer exchanges with the
          manufacturer the yen that the importer collects by exercise of
          the options.

                The agreement between the parties requires that the seller
          utilizes the options provided by the importer, and only to the
          extent that it will benefit the importer.  Any unused options
          which are not utilized to obtain yen necessary to purchase the
          piece goods are returned to the importer, assuming the scenario
          in which the options are transferred to the seller.


          ISSUE:

                Whether the value of the foreign currency exchange options
          is included in the transaction value of the final imported
          merchandise.


          LAW AND ANALYSIS:

                As indicated above, we are assuming that transaction value
          pursuant to section 402(b) of the TAA is applicable in appraising
          the merchandise.  Transaction value is defined as the "price
          actually paid or payable for the merchandise when sold for
          exportation to the United States . . . " , plus certain
          enumerated amounts.  See, section 402(b)(1) of the TAA.  The term
          "price actually paid or payable" is specifically defined in
          section 402(b)(4)(A) as " . . . the total payment . . . made, or
          to be made, for imported merchandise by the buyer to, or for the
          benefit of, the seller.     














                                        - 3 -


                The foreign currency exchange options in question are not
          payments within the meaning of section 402(b)(4)(A) of the TAA.
          The options do not appear to benefit the seller of the
          merchandise.  The only party which derives a benefit from the
          options is the buyer.  The seller has agreed to accept the
          options from the buyer, or the benefit derived from the options
          in second scenario, and has further agreed to return any unused
          portion.

                The options can not be characterized as assists since they
          do not fall within any of the enumerated items provided for in
          section 402(h)(1)(A)(i)-(iv).  In TAA #20 (Headquarters Ruling
          No. 542412 dated March 27, 1983), we stated that if a cost is not
          specifically included within the assist definition, it will not
          be treated as an assist.


          HOLDING:

                The value of the foreign currency exchange options as
          described herein are not part of the transaction value for the
          imported merchandise.


                                  Sincerely,




                                  John Durant, Director,
                                  Commercial Rulings Division