VAL CO:R:C:V 545201 LPF
District Director
U.S. Customs Service
300 S. Ferry Street - Room 1001
Terminal Island, CA 90731
RE: Internal Advice Concerning Deduction of Freight Costs from Appraised Value
Dear Sir:
This is in response to your request for internal advice
initiated by the Regional Director, Regulatory Audit Division,
concerning the deduction of freight costs from the appraised
value of telecommunication system components imported by Fujitsu
Business Communications Systems, Inc. We regret the delay in
responding.
FACTS:
Fujitsu Business Communication Systems, Inc. (FBCS) of
Anaheim, CA is a wholly-owned subsidiary of Fujitsu America, Inc.
which in turn is a wholly-owned subsidiary of Fujitsu Ltd. of
Japan (FJ). The Regulatory Audit Division (RAD), Pacific Region,
conducted an audit of FBCS as part of the national audit of FJ's
U.S. subsidiaries.
FBCS imports, manufactures, and sells business
telecommunication switching systems, consisting of two major
product lines, the Starlog system and the F9600 system. FBCS and
FJ are related parties pursuant to section 402(g) of the Trade
Agreements Act of 1979 (TAA).
Distribution agreements between FBCS and FJ for Starlog and
F9600 indicated that quoted prices were "CIF, seaport." The
agreements included provisions to adjust prices in certain cases
of air shipment. Specifically, the Starlog agreement signed on
January 28, 1988, provides that if air transportation is required
by FBCS, the CIF price will be adjusted accordingly based on
actual cost. Similarly, the F9600 agreement signed on November
10, 1989, provides that if there is a need for air
transportation, the CIF price will be adjusted accordingly based
on actual cost. It is our understanding that no distribution
agreement existed prior to 1988, but such importations likewise
were purchased on a CIF basis.
Accordingly, counsel explains that FJ shipped merchandise to
FBCS by ocean and air carrier under three circumstances. First,
when the goods were shipped by ocean carrier, FJ invoiced and
FBCS paid the unadjusted CIF price. Second, when FBCS required
or needed air transportation, FJ invoiced and FBCS paid an
adjusted CIF price to cover extra costs incurred in shipping by
air rather than by sea. Third, when FJ elected, on its own
initiative, to ship by air, FJ invoiced and FBCS paid the
unadjusted CIF price, that is, FBCS did not pay any additional
freight-related amount nor did FBCS "book" such an amount as a
"payable."
The dispute at issue stems from the entry of merchandise in
the third scenario. Invoices from FJ to FBCS indicate that
during 1988 FBCS made several disbursements to FJ for the
difference between air and sea freight related to 1987
importations. Several invoices indicate that air freight was
requested by FBCS while the other invoices contain no such
remark. It is our understanding, however, that FBCS did not make
any additional payments other than those made in connection with
the 1987 importations and that FBCS had not been billed by FJ for
air freight costs concerning importations during 1988 or any year
thereafter.
Further, the charges for air freight and insurance which were
claimed as nondutiable, were not indicated on the invoices
pertaining to 1988 and 1989 importations. Although for the
following years' importations the Customs broker wrote the
purported freight and insurance costs onto the invoices which FJ
submitted to Customs, these charges were not originally included
by FJ on the invoice.
It is RAD's position that although the importer chose air
transportation, the CIF prices of the air transported merchandise
were not adjusted or, in other words, that the CIF prices of the
air transported merchandise declared to Customs were identical to
the CIF prices of ocean transported merchandise. Accordingly,
RAD maintains that by deducting the full cost of air freight from
the CIF price which only included ocean freight, FBCS obtained a
lower dutiable value for merchandise transported by air compared
to the same merchandise transported by ocean.
Initially, RAD informed the importer that the air transported
merchandise would be reappraised utilizing the transaction value
of identical of similar merchandise, that is, the ocean
transported merchandise, because the air transported merchandise
was being entered at a lower value than the same merchandise
transported by ocean freight. RAD proposed to compute the
transaction value of similar merchandise by (1) taking the ratio
of the non-dutiable charges (NDC) over invoice value claimed on
all of fiscal year 1988 ocean entries and (2) allowing this ratio
of NDC over entered value as a deduction from the CIF price of
the air transported merchandise.
Our office met with counsel on October 26, 1994 concerning
the matter.
ISSUE:
Based on the facts presented, whether an adjustment can be
made to the transaction value of the merchandise for the
difference between the cost for international air and ocean
freight when FJ, the seller, elected to utilize the former, as
opposed to the latter, although no adjustment was made
accordingly to the CIF price for the merchandise.
LAW AND ANALYSIS:
As you are aware, the preferred method of appraisement is
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. 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 enumerated statutory additions.
The "price actually paid or payable" is defined in section
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...)
made, or to be made, for the imported merchandise by the buyer
to, or for the benefit of, the seller."
In this case, we are to determine whether the amount excluded
from the transaction value should include the difference between
the cost for international air and ocean freight. It is
counsel's position that the value law requires Customs to deduct
from the CIF price the actual costs of air transportation to
determine a transaction value.
In Headquarters Ruling Letter (HRL) 544538, issued December
17, 1992, Customs acknowledged that pursuant to section
402(b)(4)(A) 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 freight 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. Furthermore, in HRL 543827, issued March 9, 1987,
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.
In the instant case, when FJ elected, on its own initiative,
to ship by air, supposedly FJ still invoiced and FBCS still paid
the unadjusted CIF price for ocean freight. In other words, FBCS
did not pay any additional freight-related amount nor did FBCS
"book" such an amount as a "payable." Hence, the "actual" cost
for the freight apparently was paid by FJ to the freight company.
It should be noted that this arrangement is different from that
considered in HRL 543213, issued May 23, 1984, where the parties
agreed that the price for the merchandise would be adjusted to
reflect shipment by air as opposed to parcel post.
In cases such as Esprit v. United States, Slip Op. 93-43 (Ct.
Int'l Trade, decided March 26, 1993), and decisions such as HRL
545121, issued January 31, 1994, it was held that adjustments for
air freight charges, as compared to the originally agreed-upon
ocean freight charges, could not be made to the transaction
value. It is important to note that these cases involved
merchandise that was shipped on an FOB basis. Accordingly, it
was determined that the price actually paid or payable for the
merchandise did not include such freight charges in the first
place.
Among other things, Customs has recognized the differences
between FOB and CIF shipment terms with regard to the treatment
of freight charges. In particular, "Free on Board" means that
the seller fulfills his obligation to deliver when the goods have
passed over the ship's rail at the named port of shipment. This
means that the buyer has to bear all costs and risk of loss or
damage to the goods from that point. On the other hand, "Cost,
Insurance and Freight" means that the seller is obligated to pay
the costs and freight necessary to bring the goods to the named
port of destination as well as to procure and pay for marine
insurance against the buyer's risk of loss of or damage to the
goods during the carriage. See International Chamber of
Commerce, Incoterms, at 38, 44, and 50 (1990).
Based on this understanding of FOB and CIF, Customs considers
freight charges to be included in the CIF price for goods, but
considers such charges to be separate from the FOB price for
goods. Accordingly, we consider the CIF price for the
merchandise at issue to include the freight charges as agreed
upon by the parties. Regardless as to the costs that will be
borne by the importer for such freight charges (depending on the
scenario as agreed-upon by the parties) the amounts actually paid
to the freight company are to be excluded from the price actually
paid or payable for the merchandise. We reiterate, however, that
Customs may require documentation from the freight company to
substantiate the importer's claims as to the actual amounts which
are excluded. It should be noted that the fact that FJ's
invoices to FBCS may not separately identify the cost of air
freight and insurance charges does not bar Customs from excluding
such charges from the transaction value. In particular, section
402(b)(3) indicates that this requirement applies to charges for
the transportation of merchandise after importation.
We recognize that the issue concerning adjustments for the
difference between air and ocean freight should only arise in the
third scenario, that is when FBCS pays the unadjusted CIF price
when FJ elected, on its own initiative, to ship by air. However,
if it is believed that, contrary to its agreement, FBCS likewise
paid the unadjusted CIF price when air transportation was
required or needed by FBCS (the second scenario discussed in the
facts), the relationship, in general, between the parties should
thoroughly be examined in order to determine whether that
relationship influenced the price actually paid or payable for
the merchandise. Based on the information available at this
time, our office currently cannot make such a determination.
HOLDING:
Based on the facts presented, an adjustment can be made to
the transaction value, insofar as it is the appropriate method of
appraisement, for the difference between the actual cost for
international air and ocean freight reflected by the amount paid
to the freight company.
You should advise the internal advice applicant of this
decision and forward them a copy.
Sixty days from the date of this letter the Office of
Regulations and Rulings will take steps to make the 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.
Sincerely,
John Durant, Director
Commercial Rulings Division