HQ 547074
September 17,1999
VAL RR: IT: VA 547074 LPF
Steven W. Baker, Esq.
Steven W. Baker and Associates
One Sutter Street, Suite 1004
San Francisco, CA 94104 4919
RE: Freight Forwarder Commissions, Foreign Inland Freight and Loading Costs; Section
402(b)(4)(A) Exclusions from the Price Actually Paid or Payable
Dear Mr. Baker:
This is in response to your April 22, 1998 letter requesting a ruling concerning the dutiability of various costs and expenses involved in the international shipment of steel mill products. We regret the delay in issuing our response.
FACTS:
The merchandise consists of basic steel mill products, such as semi finished steel, flatrolled products, tubular products, bar and rod, and structurals. You explain that the importer or buyer, TradeARBED, and the sellers, Sidmar and Europrofil, are related parties pursuant to the definition set forth in section 402(g)(1) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. 1401 a. The sellers serve as both manufacturers and exporters. The terms of sale are C&F U. S. Port, and production and shipment may take place in or from various European countries.
In your ruling request, you pose several scenarios pertaining to the dutiability of amounts for forwarder compensation and inland freight and loading costs. In analyzing whether such amounts are excludable from the price actually paid or payable as international transportation or other incidental shipment charges, under section 402(b)(4)(A), you ask that we make several underlying assumptions. First, we are to assume that the related party price between the buyer and seller constitutes an acceptable transaction value. Second, we are to presume that all the costs, charges, and expenses at issue are properly documented by invoices, receipts, proofs of payment, contracts, agreements, or other suitable means. Third, we are to assume all transactions are C&F, whereby the seller/exporter charters the vessel and arranges for transportation of the merchandise from its production facility to the U.S. port, with all transportation costs included in the C&F price.
Freight Forwarder Commissions
Concerning freight forwarder compensation, you provide that in vessel charter situations, forwarders commonly receive commissions from vessel operators, usually in amounts ranging from approximately 1.5% to 2.5%. A forwarder's responsibilities include: preparing the bills of lading, packing lists, and other documentation in connection with the shipment, as well as overseeing the loading of the vessel. Also, you explain that pursuant to standard arrangements, the vessel broker or agent, which may be a related or unrelated party, receives approximately one third of the forwarder commission for its services.
As an example, you have provided a copy of the contract entered into between the carriers, Fednav International Ltd. and the seller/manufacturer, Sidmar NV, to the related party importer, TradeARBED. Sidmar's related party agent/ship broker, Transaf NV, arranged the contract. The contract provides for the payment of a 2.5% commission to the shipper's forwarder. Sidmar, as its own forwarder, receives the commission for services rendered, and makes a payment (0.625%) to Transaf as agent/ship broker. In this specific situation, the seller/charterer (Sidmar), as its own forwarder, takes responsibility for preparing the necessary documentation, including the employ of Transaf to prepare the bills of lading, and overseeing the movement and stowage of freight.
You provide that the importer, TradeARBED, is involved in similar transactions with other providers. In some instances, Transaf acts as both forwarder and ship broker. It therefore receives and retains the full amount of the commission. In other instances, where the shipper acts as its own forwarder and Transaf acts only as shipper/broker, the vessel operator will pay or credit the commission amount to the seller/charterer, acting as forwarder, who then makes appropriate payment to Transaf.
You assert that the importer has documented the amount of the forwarder's compensation and deducted the amounts as non dutiable international transportation costs.
Foreign Inland Freight & Loading Costs
Concerning inland freight and loading costs, you submit three scenarios. In the first scenario, the seller has a production facility which includes ocean port facilities. The services performed, after the steel is completely manufactured and packed ready for shipment to the U. S., include loading the vessel at the seller's facility through the seller's personnel and equipment.
In the second scenario, the steel mill is not located at an ocean port facility, or the steel from such a mill is shipped from a different port. Accordingly, the steel is moved by rail, truck or barge from the steel mill facility to a port of ocean lading located in the same country. The transportation may be provided by independent common carriers, by trucks or barges owned and operated by the seller, or by a combination thereof. Upon arrival at the port facility, an independent company (perhaps related or unrelated) loads the vessel and bills, and is paid by, the seller for its services.
In the third scenario, the steel mill is located in a country other than that in which the ocean port of lading is located. Similar to the second scenario, inland transportation from the steel mill facility to the border of the country of production, and from that border to the ocean port of lading, takes place via rail, truck, or barge. In some instances, this transportation is by common carrier; in other instances, the transportation is on vehicles or barges owned and operated by the seller, or by a combination thereof. Often the inland transportation will be covered by a single bill of lading covering transit through two or more countries and, in some instances, by more than one mode of transportation. Also similar to the second scenario, upon arrival at the port facility, the independent party (perhaps related or unrelated) loads the vessel and bills, and is paid by, the seller for its services.
You explain that the documentation accompanying the shipments where the seller provides transportation by its own conveyances would clearly indicate the placement of the goods for transport through to the U. S. Moreover, in almost all instances the merchandise will be designated for a particular end user in the U.S., but at a minimum be consigned to a U.S. location. Furthermore, you provide that documentation of costs incurred by the seller for such shipments could include internal time/distance/equipment usage/employee hour reports, accounting records for costs and expenses, or other similar documents. However, you acknowledge that the sufficiency of evidence would, of course, have to be decided on a case by case basis.
You state that these costs have not been claimed as part of the deductible international transportation costs. However, you assert that when properly documented, such costs could constitute such deductible amounts.
ISSUE:
Whether the amounts for freight forwarder commissions, foreign inland freight, and loading may be excluded from the price actually paid or payable as international transportation or shipment costs.
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."
In its General Notice, Actual Freight and Insurance Deductions, Vol. 31, No. 8 Customs Bulletin (February 19, 1997) at 21, Customs reiterated its long standing position concerning non dutiable charges. The Notice served as a reminder that the amount to be deducted from transaction value for freight, insurance and other costs incidental to the international shipment of merchandise, including foreign inland freight costs is the actual, as opposed to estimated, costs. The Notice explained that actual costs constitute those amounts ultimately paid to the international carrier, freight forwarder, insurance company or other appropriate provider of such services. Furthermore, it was stated that proof of such actual costs would include commercial documents to and from the service provider such as an invoice or written contract separately listing such costs, a freight/insurance bill, a through bill of lading or proof of payment of the charges (i.e., letters of credit, checks, bank statements).
Freight Forwarder Commissions
In this regard, it first should be acknowledged that Customs does not prohibit freight deductions, as appropriately evidenced by the actual costs for such amounts, in cases where the seller/shipper and freight or other service provider are related. See HRL 543827, issued March 9, 1987, and HRL 544152, issued December 7, 1988. Moreover, insofar as we understand the freight forwarder amounts to represent those types of fees ordinarily paid to such service providers, the charges at issue may be appropriately deducted from the price actually paid or payable, consistent with the standards articulated in the General Notice. HRL 545917, issued August 1, 1996, lends support to these propositions. In that case, Customs found van stuffing and palletizing services performed by the seller/manufacturer identical to services normally performed by independent cargo consolidators and shipping companies and, hence, excludable from the transaction value as services incident to international shipment.
However, concerning the instant matter, we understand that in some cases the compensation from the vessel operator is paid entirely to, and retained by, a separate party related to the seller/shipper (where the ship broker serves as both forwarder and ship broker) and in other cases it is paid to, and partly retained by, the seller/shipper itself (where the seller/shipper acts as its own forwarder and the separate party only serves as a ship broker).
Customs has addressed scenarios where freight rebates or allowances subsequently inure to the benefit of the foreign seller. One such decision, HRL 545349, issued March 24, 1995, is instructive with regard to the instant matter. In that case, Customs found that rebates from the freight carriers to the seller were to be taken into account in determining the transaction value. Similarly; in cases where compensation in the form of commissions inures to the benefit of the seller, Sidmar NV, such amounts, like the rebates and allowances in HRL 545349, must be taken into account in determining the transaction value. In other words, the price actually paid or payable would include the amount of compensation, that is, the portion of the commission, remitted to, and maintained by, the seller. To the contrary, where the commissions are paid entirely to, and retained by, entities separate from the seller, it would not be necessary for such amounts to be taken into account when determining the transaction value. It should be noted that such a finding is based upon the presumption that appropriate documentary support exists in this particular case.
Foreign Inland Freight & Loading Costs
Consistent with judicial precedent, Customs maintains that loading costs generally are excludable from the transaction value as a cost incident to the international shipment of the imported merchandise. Sec HRL 547146, issued May 14, 1999, concerning the non dutiability of terminal handling charges and cases cited therein; see also Kurt Orban v. United States, 65 CCPA 73, 79 (1978). Accordingly, the loading costs at issue in all three scenarios set forth above, which qualify as C&F shipments, may be excluded from the transaction value, assuming the appropriate documentary support exists in this particular case.
With regard to foreign inland freight, 19 C.F.R. §152.103(5)(ii) provides that for sales other than ex factory, where the price actually paid or payable includes a charge for foreign inland freight, that charge will be part of the transaction value to the extent included in the price. However, charges for foreign inland freight and other services incident to the shipment of the merchandise to the United States may be considered incident to the international shipment if they are identified separately and they occur after the merchandise has been sold for export to the United States and placed with a carrier for through shipment to the United States. 19 C.F.R. § 152.103(5)(iii) adds that a through bill of lading shall establish such a sale for export and placement for through shipment to the United States. Only where it clearly would be impossible to ship merchandise on a through bill of lading (e.g., shipments via the seller's own conveyance) will other documentation satisfactory to the port director, showing a sale for export to the United States and placement for through shipment to the United States, be accepted in lieu of a through bill of lading.
Accordingly, in scenarios two and three set forth above, where foreign inland freight charges accrue within the country of exportation it would be necessary, in accordance with 19 U.S.C. §152.103(5) to separately identify these charges, verify they occur after the merchandise has been sold for export to the U.S., and provide evidence by way of a through bill of lading that the merchandise was placed with a carrier for through shipment to the U. S. In cases where the inland transportation is provided by the seller via its own conveyances, rather than by a hired carrier, it would be necessary to present the documentary support in that specific case for consideration by the appropriate port director. Accordingly, while you indicate that the documentation accompanying the shipments where the seller provides transportation by its own conveyances would clearly indicate the placement of the goods for transport through to the U.S., the sufficiency of the evidence submitted concerning such costs would have to be considered on a case by case basis.
Finally, in scenario three, where "foreign inland freight" charges accrue in foreign countries additional to the country of production, we recognize that the analysis discussed above would apply to the costs of foreign inland freight in the country of production. However, the transportation costs from the border in the country of production through the other foreign countries to the final port of ocean lading to the U. S., would be considered international transportation or shipment costs excludable from the transaction value (as opposed to foreign inland freight charges), assuming the appropriate documentary support exists in this particular case. See HRL 545579, issued September 14, 1994.
HOLDING:
The amounts for freight forwarder commissions, when paid entirely to, and retained by, entities separate from the seller, may be excluded from the price actually paid or payable as international transportation or shipment costs. However, in cases where such compensation inures to the benefit of the seller, those remitted amounts must be taken into account in determining the transaction value. The amounts for foreign inland freight and loading may be excluded from the price actually paid or payable as international transportation or shipment costs. In all cases such deductions would be permissible assuming the appropriate documentary support exists in that particular case.
Sincerely,
Thomas L. Lobred
Chief, Value Branch