HQ 544340: Payments for Failure to Purchase the Minumum Quantity of Fabric; 19 U.S.C. 1401a(b)(1); Generra Sportswear Co. v. U.S.

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 544340 
                       September 11, 1990

VAL CO:R:C:V  544340 DHS

CATEGORY:  Valuation 

Frank J. Desiderio, Esq.
Grunfeld, Desiderio, Lebowitz & Silverman
12 East 49th Street
New York, Ny  10017

RE:  Payments for Failure to Purchase the Minumum Quantity of
     Fabric; 19 U.S.C. 1401a(b)(1); Generra Sportswear Co. v.
     U.S.

Dear Mr. Desiderio:

     This is in response to your letter of May 19, 1989,
requesting a ruling regarding the dutiability of payments made by
Bernard Chaus, Inc. (hereinafter referred to as the "importer")
to an unrelated fabric vendor (hereinafter referred to as the
manufacturer).  Please accept our apologies for the delay in
responding.

FACTS:    

     You have provided the following facts.  The importer
purchases fabric to utilize in the production of samples.  The
manufacturer requires that the importer purchase minimum
quantities of fabric (i.e., 600 yards per color on solid fabrics,
3,000 yards per print on screen prints, and 6,000 yards on rotary
print fabrics).  When the importer does not order the minimum
quantity specified, the vendor imposes a charge (e.g., $1,000 or
$1,250) which is separately indicated on the fabric invoice.  You
state that it is unlikely that the importer will ever order the
minimum quantity since only 50 to 75 yards are required for the
production of samples.

     You have stated pursuant to our phone conversation that the
charge imposed is always 150,000 yen per style.  Since the
importer pays the seller in U.S. dollars the amount shown on the
invoices may vary based upon the currency conversion rate agreed
upon between the parties.  

ISSUE:

     Whether the importer's payment to the seller for failure to
purchase the minimum quantity of fabric is part of the price
actually paid or payable. 

LAW AND ANALYSIS:

     The term "price actually paid or payable" is defined in
section 402(b)(4)(A) of the Tariff Act of 1930 as amended by the
Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)(1)):  
          . . . 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.

     Section 152.103(a)(1) of the Customs Regulations (19 CFR
152.103(a)(1)), provides that the "price actually paid or
payable":

     ...will be considered without regard to its method of
     derivation.  It may be the result of discounts, 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 actual payment has not been made
     at the time of importation. . . .

     In this case, you contend that the monies paid for failure
to order the minimum amount of fabric is not part of the price
actually paid or payable for the imported fabric, but rather is
in the nature of a penalty for goods not imported. 

     Our review of the facts presented indicates that since there
is little likelihood that the minimum quantities will be
purchased, the total payment for the imported merchandise will
usually include the surcharge.  Accordingly, this amount is part
of the price actually paid or payable.  See, Generra Sportswear
Co. v. U.S., Slip Op. 89-1652, dated May 22, 1990.

     Headquarters decisions consistent with this position include
Headquarters Ruling Letter (HRL) 543445, dated October 23, 1985
and HRL 544205, dated December 12, 1988. 

     In HRL 543445, the parties agreed to a "base selling price"
plus additional compensation in the event that a minimum number
of gasoline engines were not purchased.  We held that the
agreement essentially provided that the final unit price for the
engines purchased during a model year would not be known until
the number of engines actually purchased during the year was
known.  Therefore, we concluded that there was a direct
relationship between the additional compensation and the engines
that were purchased and imported, and were part of the price
actually paid or payable for the engines.  The amount paid was to
be apportioned over the number of engines actually imported in
the relevant model year.  

     In HRL 544205, dated December 12, 1988, a similar scenario
as HRL 543445 was presented.  In that case, the price schedule
provided for a price reduction as the quantity purchased
increased.  The contract language specifically provided for a
cpurchase price adjustment if the minimum number of engines was
not purchased.  We concluded that the entire payment was the
price actually paid for the engines purchased for the model year. 

     You cite HRL 543295, dated January 15, 1985, in support of
your position.  In that ruling letter, the ultimate purchaser
paid the seller an amount for lost contributions due to the
unanticipated reduced volume of purchases below the minimum
quantities specified in the contract.  We concluded that even if
the payment was made by the buyer to the seller, that this amount
would not form part of the price actually paid for the imported
merchandise for the reason that this payment was made to
compensate the parent company for merchandise which was
contracted for but not imported.  Further, the documentation
furnished in HRL 543295 clearly established that the additional
contributions provided the seller were  made on the basis of a
settlement agreement, a document completely separate from the
purchase order.  Additionally, no evidence existed which
indicated that the parties intended this arrangement at the time
of purchase.  

     It is our opinion that the payment in question is paid as
part of the price actually paid or payable for the imported
merchandise.  This is to be distinguished from a penalty charge
which is independent of the price actually paid or payable for
the the imported merchandise.  

     Accordingly, the "price actually paid or payable" for the
imported fabric would include the payment to the seller for the
failure to purchase the minimum quantity of fabric. 

HOLDING:

     The payment to the seller for the failure to purchase the
minimum quantity of fabric is part of price actually paid or
payable for the imported merchandise. 


                                   Sincerely,


                    
                                   John Durant, Director