VAL RR:IT:VA 546422 LPF

Mr. William J. Ramia, Jr.
Alexander International
Memphis International Airport
P.O. Box 30209
Memphis, TN 38130

RE: Freight exclusion from price actually paid or payable; Renegotiated price for late delivery; Section 402(b)(4) of the TAA; Esprit; C.S.D. 83-62; HRLs 545121, 544911

Dear Mr. Ramia:

This is in response to your letters of June 1, 1996 and December 17, 1996 concerning the valuation, specifically the appropriate deduction for international freight costs, of women's apparel. We have granted confidential treatment to the name of the concerned importer, as requested in your letter. Additionally, we regret the delay in issuing our response.

FACTS:

You explain that the majority of the subject apparel importations are shipped to the U.S. via ocean carrier on a collect freight basis. The terms of purchase typically are set up as FOB Port of Origin. The importer often utilizes the services of buying agents on many of these purchases, most of which are transacted by way of a letter of credit (L/C). You state that there are no cases where the importer is related to a shipper or supplier. We, therefore, assume transaction value pursuant to section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401a, is the appropriate method of appraisement for the imported merchandise.

You submit that when the supplier has difficulties in meeting agreed to production deadlines and the importer must decide whether they still need the merchandise at this late date, they often refuse to extend the L/C to accommodate late shipment. When this occurs, you provide that the supplier frequently offers to send the goods via air freight at their expense, in order to not lose the sale. In these cases, the importer normally agrees to pay what would have been the sea freight cost, while the supplier pays the additional air freight costs.

In one scenario, your inquiry concerns changes, prior to exportation, of the original purchase contract between the importer and supplier as well as the terms of sale from FOB Port of Origin to C&F Port of Destination and whether the resulting prepaid freight amounts may be deducted from the value of the merchandise. You explain that in these cases the importer intends to include a clause in their L/C's that would clarify exactly what should happen in the event of late shipment. You submit that the importer proposes a clause to cover late production of merchandise and a statement that, if the importer willingly continues to accept the merchandise at all, the terms of sale would change to reflect C&F Destination. In addition, the importer proposes to agree to a higher cost reflecting what would have been the equivalent to the sea freight cost. For instance, if the sea freight cost for the garments was $.10 each, then the importer proposes to have the L/C indicate, in cases where it is agreed that late shipment by air freight will occur at the suppliers' expense, a new first cost of $1.10 each with terms of purchase C&F Destination. The importer, accordingly, would deduct from the value the air freight cost borne by the supplier. The freight company also would be required to indicate the actual costs associated with such transactions.

In a second scenario, your inquiry concerns the same facts as provided above, except that the shipper/supplier does not actually re-type the terms of sale as now being C&F Destination. You question whether this in and of itself would preclude the importer from deducting the prepaid freight charges from the value, since the negotiated L/C would constitute a record of the agreement between the importer and the supplier.

In a third scenario, your inquiry also concerns the same facts, except that nothing is stated in the L/C indicating what occurs in case of late shipment. You question whether changing the terms of sale to C&F Destination on the commercial invoice would be sufficient to permit a deduction of the prepaid freight charges from the value. In sum, you maintain that as long as there is sufficient evidence to indicate that the price actually paid or payable was changed prior to exportation, the prepaid freight charges should be deducted.

In any case, you explain that the importer would document that the price they are agreeing to pay includes these freight charges and, therefore, is excludable from the value.

ISSUE:

Whether an adjustment may be made to the price actually paid or payable for the imported merchandise for the actual costs of the international air as opposed to ocean freight where, prior to exportation, the terms of sale are changed from FOB Port of Origin to C&F Port of Destination on the commercial invoice and/or a late production clause is included on the L/C's, as opposed to the purchase orders, supply or sales agreements or other such documentation.

LAW AND ANALYSIS:

The preferred method of appraising merchandise imported into the U.S. is transaction value pursuant to section 402(b) of the TAA. Section 402(b)(1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the "price actually paid or payable for the merchandise when sold for exportation to the United States" plus the enumerated statutory additions.

The "price actually paid or payable" is defined in section 402(b)(4)(A) as 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 . . .) made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller."

Numerous decisions have been rendered by Customs as well as the courts addressing the appropriate adjustment to be made to the price actually paid or payable for international freight or shipment costs. Several of these are instructive in the instant matter because they have concerned deductions for international air as opposed to ocean freight where terms of sale were changed, in most cases, from FOB Port of Origin to C&F Port of Destination. For instance, in the case of Esprit De Corp. v. United States, 17 CIT 195 (1993), shoes manufactured in China were to be shipped by sea from Hong Kong to the U.S. The purchase orders and letters of credit provided for purchases on FOB Hong Kong terms, with Esprit responsible for costs of shipping and insurance to the U.S. Before the initial shipping dates, the seller advised Esprit's agent that it would be unable to meet shipping date requirements. In order for Esprit to meet delivery commitments to its customers it was agreed, before shipment to the U.S., that the goods would be shipped by air. The arrival dates still were later than the initial sea shipment dates. Esprit made payment according to the terms of the purchase orders and letters of credit at the original FOB Hong Kong prices, plus the cost of air freight. The seller reimbursed Esprit for the amount of the cost differential between sea and air shipment.

Esprit claimed that because its letter of credit stated that a late shipment would be subject to cancellation, payment of the freight differential was a renegotiation of the original contract. Esprit further contended that the agreement negotiated by its agent with the seller, prior to shipment to the U.S., effectively was a price discount. The Court of International Trade (CIT) found that the evidence in Esprit did not support a finding that shipping was part of, or that price reductions were made to, the price actually paid or payable. Specifically, the CIT disagreed with Esprit's contention that because it arranged and initially paid for the air freight, it continued to bear the full cost of transportation and, accordingly, any rebate reduced the invoice price of the merchandise. Rather, the CIT found that the evidence simply confirmed that the manufacturer reimbursed the importer for the additional cost of air freight, with the seller bearing the burden of the delay.

Furthermore, in HRL 545121, issued January 31, 1994, the importer contracted with various sellers for the purchase of wearing apparel on an FOB basis. The delivery dates were specified by purchase order. Late delivery agreements between the importer and the sellers stated that if the seller failed to make timely delivery but the importer agreed to accept late delivery, the seller was obligated to ship the merchandise by air and assume the cost of air freight in excess of the sea freight which the importer would have paid had the merchandise been shipped by ocean on an FOB basis.

The goods were shipped freight collect and terms of payment were made by L/C with the importer securing a refund from the manufacturer for the cost of the air freight, minus the average amount of the sea freight which the importer would have paid had the delivery been timely. In such cases, the transacting parties agreed that the seller would change the terms of the commercial invoice from FOB Hong Kong to C&F Boston and add a statement on the invoice identifying that there was to be a reimbursement allowance for the average sea freight. In some cases, however, the manufacturer erroneously stated FOB terms on the invoice. In citing to Esprit, Customs likewise found in HRL 545121 that the parties did not appear to contemplate a change in the price of the goods nor was any evidence presented to support a finding that freight charges ever were part of the price. Rather, Customs stated that a change merely was contemplated as to who would assume the additional shipping cost in instances of late delivery. The price of the goods remained the same. Customs explained that it was immaterial that the late delivery agreements were in existence before the time of exportation unless there was also evidence that the parties intended to adjust the price actually paid or payable for the merchandise in the event of late delivery. The late delivery agreements provided made no reference to a reduction in the price actually paid or payable. Hence, Customs found the documents presented as evidence of the parties' intent to adjust the price unpersuasive.

However, Customs did acknowledge that consistent with C.S.D. 83-62, 17 Cust. Bull. 868 (1983) if the original purchase order contained a provision indicating that the price actually paid or payable would be reduced in the event of late shipment, it would be possible that the reduced amount paid could represent the transaction value. In C.S.D. 83-62 the parties agreed to include a clause in their purchase contracts concerning situations where the manufacturer, due to delays, would airfreight the merchandise to the importer, incurring substantial additional cost above the normal ocean freight rates. The clause stated:

[s]eller acknowledges that the date inserted on the front of this form . . . is the "DELIVERY DATE". . . . [I]f seller fails for any reason . . . to deliver all of the goods in conformity with this contract on or before the DELIVERY DATE, the contract price for the goods shall be reduced prior to shipment thereof by an amount equal to the difference between (i) the estimated cost of shipping the goods by ocean freight to the PORT OF ENTRY specified on the front of this form and (ii) the actual cost of such other faster means of transportation as may then reasonably be chosen by the CORPORATION for transportation of the goods to the PORT OF ENTRY so as to permit the CORPORATION to maintain its schedule for the goods to the extent possible under the circumstances

In this instance, Customs agreed that the invoice price would take into consideration the price reductions set forth in the clause, would be reduced prior to shipment and appropriately would represent the transaction value of the imported goods. See also HRL 544911, issued April 6, 1993, where because a similar clause would be inserted in purchase orders for the imported merchandise, Customs found the renegotiated invoice price, accounting for late delivery and a faster more costly means of transportation, to represent an acceptable transaction value.

Accordingly, concerning the instant matter, if a price reduction clause similar to that contemplated in C.S.D. 83-62 and HRL 544911 was to be inserted in the purchase orders for the merchandise Customs could find the C&F Port of Destination invoice price to represent a reduction in the price of the goods prior to shipment and to appropriately represent the transaction value of the imported goods, with a deduction made for the resulting prepaid freight amounts apparently included in that price. L/C's primarily concern the financing and payment for a transaction and may serve as proof of payment for the merchandise once purchased. On the other hand, Customs, consistent with its prior decisions, would find the inclusion of such language in purchase orders, supply or sales agreements or other such documents more closely tied to the purchase and sale of the merchandise as evidence that the transacting parties actually contemplated and effected a reduction to the price actually paid or payable for the merchandise. Hence, providing such language on the L/C's or merely altering the terms of sale on a commercial invoice would not suffice as evidence of a price reduction.

With regard to the appropriate designation of the terms of sale on the commercial invoice by the shipper/supplier, we simply would stress that in accordance with 19 U.S.C. 1484(a)(1)(B), the importer of record is required using reasonable care to complete the entry by filing with Customs, among other things, the declared value and other information as is necessary to enable Customs to properly assess duties on the merchandise, collect accurate statistics with respect to the merchandise, and determine whether any other applicable requirement of law (other than a requirement relating to release from customs custody) is met. While, based on the information currently provided, we cannot determine whether an inaccurate invoice designation prima facie would be inconsistent with the standard set forth in 19 U.S.C. 1484, we would emphasize in this context the importance of providing such accurate information or documentation to Customs. HOLDING:

An adjustment to the price actually paid payable for the imported merchandise for the actual costs of the international air as opposed to ocean freight would be inappropriate where, prior to exportation, the terms of sale merely are changed from FOB Port of Origin to C&F Port of Destination on the commercial invoice and/or a late production clause is included on the L/C's as opposed to the purchase orders, supply or sales agreements or other such documents more closely tied to the purchase and sale of the merchandise.

Sincerely,


Acting Director
International Trade Compliance
Division