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