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Determining the “Effect” of Post-Importation Discounts on Value for Duty

Posted April 25, 2014

For companies concerned about the valuation of imported goods for customs purposes, and most particularly those whose imports involve contractual sales agreements with related parties in the United States or elsewhere, a recently published appeal before the Canadian International Trade Tribunal (CITT) offers some important insights regarding the way in which relevant sections of the Customs Act pertaining to the dutiable value of goods are to be interpreted with respect to how and when the application of certain post-importation discounts can be factored into the transaction value for purposes of duty assessment.

CITT Appeal No. AP-2012-067 was filed by Hudson’s Bay Company (HBC) on February 12, 2013, pursuant to subsection 67(1) of the Customs Act from a further re-determination by the President of the Canada Border Services Agency (CBSA), dated November 15, 2012, made pursuant to subsection 60(4).
HBC Crest
The appeal concerns the calculation of the value for duty of goods imported by HBC from Macy’s Merchandising Group (Macy’s) and, more specifically, whether the CBSA correctly determined that the “margin support” and “advertising support” discounts (the discounts) granted to HBC by Macy’s were properly excluded from the price paid or payable because they were “effected” after importation.

The term “effected” is not defined in the Customs Act and is not used in this sense anywhere else in the legislation and therefore must be understood in its ordinary meaning, and consistently with the context in which it is found. In this regard the CITT determined the word to mean “a nascent moment when an obligation is caused to come into being, is put into operation, or is otherwise caused to exist or occur.”

HBC argued that the price paid or payable should be adjusted to reflect the discounts because the agreement between it and Macy’s is what “effected” the discounts, and this agreement was in place prior to the importations.

The CBSA maintained that the discounts should not be considered part of the agreed price paid or payable between HBC and Macy’s, as evidenced by the terms of sale found on the commercial invoices, the purchase orders, the payment, the accounting, and the books and records kept by HBC. In particular, the CBSA relied on the fact that the discounts were not entered as a term of sale on the commercial invoices or purchase orders, or recorded as receivable in the books and records at the time of importation. The CBSA relied on Memorandum D13-4-10 to support its position that all terms of sale must be reflected in the importer’s accounting documents in order to be considered in the calculation of the price paid or payable.

The CITT agreed with HBC that there is actually no clear direction to importers regarding any requirement to include the terms of any discount on commercial invoices or purchase orders. Instead, its opinion was that the instructions of D13-4-10 are, at most, guidelines on which value-for-duty code to use when filling out the CBSA’s B3 Form, but that it does not speak to any requirement with respect to the contents of the documents that will be submitted in support of the value-for-duty declaration.

Further, the CITT noted that Memorandum D13-4-10 does not cite any specific legislative reference to support this requirement, which would therefore appear to be CBSA’s administrative policy only, and  accordingly the requirement does not sufficiently or accurately reflect the legislative ambit of paragraph 48(5)(c) itself.

In allowing the appeal, the CITT stated that:

Paragraph 48(5)(c) of the Act cannot be read in a strict and rigid manner which would prohibit any corrections or modifications after the effective date of importation. If the conditions for such a correction or modification existed before the importation of the goods, then a request for a refund of duties paid can be made in accordance with the appropriate paragraph of subsection 74(1) of the Act, or a correction can be filed in accordance with section 32.2 of the Act if no duty was owing as a result of the original accounting.

The CITT found that HBC appropriately filed for a re-determination and refund under paragraph 74(1)(e) of the Act on the basis that it had made an error when accounting for the goods and that the discounts should be deducted from the price paid or payable, as they were “effected” prior to the importation of the goods and therefore should not be disregarded in accordance with paragraph 48(5)(c) of the Act.