RR:IT:VA 546868 LR
Ms. Alice Rigdon
Port Director
U.S. Customs Service
55 Battery Street, Room 321
San Francisco, CA 94111
RE: Request for Internal Advice; international shipment;
transportation; actual freight; despatch; demurrage
Dear Ms. Rigdon:
This is in response to your memorandum dated September 8,
1997 forwarding a request for internal advice submitted by
counsel on behalf of Pohang Steel America Corporation (POSAM)
regarding freight charges. Specifically, the issue concerns
whether certain despatch and demurrage amounts should be taken
into account in determining the appropriate non-dutiable freight
charges. This issue arose in connection with a prior disclosure
letter submitted by POSAM regarding its failure to report actual
freight costs. This subject was also raised during a Compliance
Assessment of POSAM and is addressed in Customs Compliance
Assessment Report dated April 13, 1998. We regret the delay in
responding.
FACTS:
POSAM imports steel on a C&F basis from Pohang Iron & Steel
Co., Ltd ("POSCO"), the manufacturer. POSAM is a wholly owned
subsidiary of POSCO in South Korea. According to counsel, the
steel is sold initially to POSAM and them resold by POSAM to USS-POSCO Industries ("UPI"), an equally owned joint venture of POSCO
and USX Corporation.
Deductions for international freight from the invoice price
declared by POSAM were taken; however such deductions were based
on estimated, rather than actual, freight costs. For purposes of
this ruling we are assuming that transaction value is the proper
method of appraisement. However, the proper method of
appraisement is beyond the scope of this decision.
According to counsel, POSCO has entered into contracts with
several steamship companies in South Korea for the shipment of
steel to the United States. These long term contracts of
affreightment require POSCO to ship steel to UPI in the United
States over long periods of time, for example, 198 years.
Counsel has submitted a copy of a long term contract of
affreightment between POSCO and Hyundai Merchant Marine Co., Ltd
(Hyundai). The total charges for each shipment of steel to the
United States under the term of the contract consist of (1) the
basic freight rate (Article 5), (2) the bunker surcharge (Article
5.8), and (3) the dead freight charge (Article 15). The basic
freight rate and bunker surcharge are present for every shipment,
while the incremental cost of dead freight only comes into play
if POSCO fails to load any given vessel with the minimum cargo
quantity agreed upon between the parties. The basic freight
charge, the bunker surcharge, and the dead freight charge, if
any, are due and payable within 15 days from the date in the bill
of lading. There is no disagreement that the above amounts are
included in the actual freight costs. However, as discussed
below, the contracts also provide for the payment of despatch and
demurrage amounts which are at issue here.
In a letter dated January 6, 1997, POSAM disclosed to
Customs that the entered values did not take into account the
actual freight costs in shipping the steel from South Korea to
the United States. In calculating the additional duties due,
POSAM accounted for the basic freight, the bunker surcharge and
the dead freight charges but not despatch and demurrage amounts.
POSAM has estimated roughly that if these amounts are taken into
account in the reconciliation of freight charges, there would be
an additional amount owing of approximately $100,000 to $110,000
in duty for the period January 1992 to September 30,1996.
Despatch and demurrage payments are covered in a separate
agreement submitted as Exhibit 3. Despatch/demurrage amounts
relate to the rate at which the steel is loaded onto the vessel.
The contract provides for a daily rate of 6,000 metric tons per
day. According to Exhibit 3, if the contract rate is exceeded,
Hyundai is to pay POSCO a despatch payment of $13,200 per day.
If the loading rate is not achieved, POSCO is to pay Hyundai a
demurrage amount of $13,200 per day.
POSAM's position is that the despatch/demurrage amounts
should not be taken into account in determining the proper amount
of actual freight to be deducted from the C&F prices for the
steel. You indicate that it is the position of CST 768 and
members of the CAT that these payments and charges are part of
the ultimate actual freight and should be taken into account in
determining the appropriate deduction.
ISSUE:
Whether the despatch/demurrage amounts are to be taken into
account when determining the appropriate non-dutiable
international freight to be deducted from the price actually paid
or payable in determining transaction value.
LAW AND ANALYSIS:
The preferred method of appraisement is transaction value
which is defined by 402(b)(1) of the TAA (19 U.S.C. 1401a(b))
as "the price actually paid or payable for the merchandise when
sold for exportation to the United States..." plus certain
additions specified in 402(b)(1) (A) through (E). The term
"price actually paid or payable" is defined in 402(b)(4)(A) of
the TAA 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 from the
country of exportation to the place of importation in the
United States) made, or to be made, for imported merchandise
by the buyer to, or for the benefit of, the seller.
Transportation costs and insurance costs pertaining to the
international movement of merchandise from the country of
exportation, to the extent included in the price actually paid or
payable, are to be excluded from the total payment made for
imported merchandise appraised under transaction value. These
costs are not the estimated costs, but the actual costs paid to
the freight forwarder, transport company, etc.
In Headquarters Ruling Letter ("HRL") 544538, December 17,
1992, Customs acknowledged that pursuant to 402(b)(4)(A) of the
TAA the cost of international transportation is to be excluded
from the price actually paid or payable for imported merchandise.
However, Customs explained that in determining the cost of the
international transportation or freight, it always looked to
documentation from the freight company, as opposed to the
documentation between the buyer and the seller which often
contains estimated transportation costs or charges. In essence,
Customs requires documentation from the freight company because
the actual cost, and not the estimated charges, for the freight
is the amount that Customs excludes from the price actually paid
or payable. See also HRL 543827, March 9, 1987, in which Customs
determined that the proper deduction from the price actually paid
or payable for marine insurance was the amount actually paid to
the insurance company by the seller, as opposed to the amount
paid by the related importer/buyer; and HRL 542467 dated August
13, 1981.
In this case, the actual freight costs are the amounts POSCO
pays to the steamship companies, such as Hyundai. As noted
above, in addition to the basic freight rates, the contract with
Hyundai calls for a despatch payment from Hyundai to POSCO if the
contract loading rate of 6,000 metric tons per day is exceeded
and for a demurrage payment from POSCO to Hyundai if the loading
rate is not met.
As indicated above, a deduction for freight is appropriate
only to the extent it is included in the price actually paid or
payable. POSAM indicates that the despatch/demurrage component
is included in the C&F price for the imported steel since (1)
where a despatch amount is owing to POSCO, that amount is not
passed on to POSAM or (2) where a demurrage charge is made by the
steamship company to POSCO, that additional charge is not passed
along to POSAM.
Although included in the price actually paid or payable,
POSAM contends that despatch and demurrage amounts should be
disregarded in determining the actual international freight
deduction. First, it claims that these amounts were the subject
of a separate account between Hyundai and POSCO and are not
included in the account for the charges related to the basic
freight, the bunker surcharge, and the dead freight charges.
POSAM also claims that these payments or charges accrued in
connection with the time use of the vessel itself and not in
connection with the actual carriage of the cargo laden onto the
vessel. Therefore, POSAM claims that these amount were equipment
usage payments or charges, and not part of the actual freight
involved in moving the cargo to the United States.
We disagree. Although we have not found any previous court
decisions or rulings which specifically address the issue of
whether despatch/demurrage payments and charges are to be taken
into account when determining the actual amount paid for
international freight, the dutiability of loading charges
associated with loading imported merchandise aboard vessels bound
for the United States has been addressed. In Kurt Orban v.
United States, 65 CCPA 73, 79 (1978), the U.S. Court of Customs
and Patent Appeals determined that such loading charges should
not be included in the dutiable value of the imported merchandise
based in part on the fact that "the loading process in an
essential step in the ocean transportation service." Customs
has also recognized that loading merchandise onto a vessel
destined for the U.S. constitutes services incident to
international shipment. See HRL 543518, September 3, 1985. In
that case, Customs determined that charges for moving steel
products off the pier and onto the ocean vessel and for placing
or storing the steel after it is aboard ship are expenses
incurred incident to the international shipment of the goods
within the meaning of section 402(b)(4)(A) of the TAA. There,
the seller paid the vessel owner for ocean freight and separately
engaged terminal labor to load and stow the steel aboard ship.
In HRL 545917, August 1, 1996, Customs determined that
certain payments relating to van stuffing and palletizing
operations were incidental to the international shipment of the
goods, and not part of transaction value. Van stuffing and
palletizing was described as the operation of placing and
arranging the packed cartons into containers to minimize wasted
space and freight charges. Although these operations were
performed at the Philippine facility by the importer's related
company, the evidence presented indicated that these services are
identical to services normally performed by independent cargo
consolidators and shipping companies.
Similarly, we find that the despatch and demurrage amounts
at issue here are associated with the cost of actual freight
involved in moving such cargo to the United States and that they
constitute part of the actual freight costs. The amounts in
question directly relate to the rate of loading the steel onto
the vessel and this rate affects the total amount POSCO must pay
to Hyundai. Therefore, we find that these amounts are to be
taken into account in determining the actual international
freight costs. The fact that despatch/demurrage are the subject
of a separate account between Hyundai and POSCO has no bearing on
whether they are part of international freight.
HOLDING:
Despatch and demurrage payment amounts at the loading port
are to be taken into account when determining the amount of non-dutiable actual international freight costs paid in connection
with POSAM's steel importations.
The Office of Regulations and Rulings will take steps to
make this decision available to Customs personnel via the Customs
Rulings Module in ACS and the public via the Diskette
Subscription Service, Freedom of Information Act and other public
access channels 60 days from the date of this decision.
Sincerely,
Acting Director
International Trade Compliance Division