HQ 0544646 - Deductions From the Appraised Value for Freight Costs; Application for Further Review of Protest No. XXXX - United States International Trade Commision Rulings

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HQ 544646

December 23, 1991

VAL CO:R:C:V 544646 ML

CATEGORY: VALUATION

District Director
Boston, Ma. 02222-1059

RE: Deductions From the Appraised Value for Freight Costs; Application for Further Review of Protest No. XXXX

Dear Sir:

The protest was filed against your appraisement decision in the liquidation of various entries made by Susan Bristol Inc. of ladies' wool sweaters made in China. The protestant takes issue with the assessment of duty which it asserts was based upon a value which failed to reflect a deduction for charges relating to international air freight. The merchandise was appraised pursuant to transaction value, section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)).

FACTS:

Susan Bristol Inc. (hereinafter referred to as the "importer"), imported ladies' knit blouses from China. The merchandise was manufactured by Cheong Knitting & Garment Factory, Ltd. (hereinafter referred to as the "manufacturer") through the China National Textiles Import & Export Corp. Counsel for the importer stated that Archer Enterprises Ltd, (herein after referred to as the "agent") served as the importer's buying agent in the transaction. A buying agency agreement has been on file in your District since 1986 and you are satisfied that the agent is a bona fide buying agent (we note that the Customs Protest and Summons Information Report listed the manufacturer and seller as Archer Enterprises, and the Production Order issued by the importer listed Archer Enterprises/Wang Cheong Knitting & Garment Factory, Ltd. as the vendor).

The manufacturer was contractually obligated to ship the merchandise by sea freight, FOB Hong Kong on or before April 20, 1989. The merchandise was not sent until June 8, 1989. The importer agreed to accept the merchandise contingent upon the manufacturer's adherence to an "Agreement" which the parties had entered into prior to the exportation of the merchandise.

Counsel for the importer maintains that the Agreement entered into between the importer and the seller prior to exportation of the merchandise provided for the delivery terms to be changed to C&F by air for goods that were shipped 15 days later than the agreed upon order completion date. The "Late Delivery Agreement" obligated the seller for the cost of air freight, with the importer crediting $.40 per piece, which represented the cost of sea freight. Counsel notes that this issue may involve almost all of its suppliers/sellers. The importer has entered into agreements concerning late delivery and they provide that the supplier bear the cost of air freight minus an allowance for average sea freight which the importer would have paid under FOB terms, if delivery had been timely. Counsel notes that in some instances the suppliers have not claimed the differential.

Counsel submitted an undated letter from Julie Nomi, Vice President, Product Development and Sourcing, for the importer, wherein she stated that she had negotiated and executed on behalf of the importer, an Agreement with the buying agent regarding purchase agreements on which the seller failed to make delivery on or before the agreed upon delivery date plus 15 days. Under the Agreement, if the importer agreed to accept delivery, the seller was required to assume the cost of air freight and prepay the air freight with the importer agreeing to grant the seller a credit of $.40 per piece base upon the average sea freight cost.

In the instant case, the importer paid the seller the same total amount as stipulated in the purchase agreement. The merchandise was paid for by letter of credit. The commercial invoice filed in support of the entry summary stated that the invoice price was "FOB Hong Kong". The Import Specialist is of the opinion that the late delivery arrangement is more of a penalty or liquidated damages clause, and therefore, Customs should not refund any duties paid.

The National Import Specialist agreed with the importer that duties should be refunded. He asserted that the Customs broker erroneously entered the merchandise using the FOB Hong Kong invoice price but that the international freight charges do not form part of the dutiable value of the merchandise because of the pre-existing late delivery arrangement which represents, in his opinion, a renegotiated price for the merchandise prior to shipment.

ISSUE:

Whether the charges for air freight were included in the price actually paid or payable for the imported merchandise.

LAW AND ANALYSIS:

Transaction value, the method of appraisement used in connection with this importation, is defined in section 402(b) of the TAA, as the "price actually paid or payable for the merchandise when sold for exportation to the United States" plus certain enumerated additions not relevant here. This is more specifically defined in section 402(b)(4)(A) of the TAA, as the following:

...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. (emphasis added)

Counsel finds support for its position in Customs Service Decision (C.S.D.) 83-62, (HRL 543014, dated February 15, 1983), which involved a contract price reduced prior to shipment due to late delivery. If the seller failed to deliver the goods in conformity with the contract on or before the delivery date the contract price for the goods would be reduced prior to shipment. Customs agreed that the invoice price would be reduced prior to shipment and would represent the transaction value for appraisement purposes. Customs stated that in connection with the proposed importations the price actually paid or payable would take into consideration the price reductions as set forth.

The import specialist cites HRL's 543537, dated February 14, 1986, and 543213, dated May 23, 1984, in support of its belief that the late delivery agreement should not be considered when appraising the imported merchandise. HRL 543537 addressed a reduction in the purchase price of merchandise as a result of late delivery. In that case, the importer sought and received a decrease in the purchase price after the date of importation. Customs held that pursuant to section 402(b)(4)(B) of the TAA, which states that any rebate of, or other decrease in, the price actually paid or payable that is effected after the dated of importation of the merchandise shall be disregarded in determining transaction, we were precluded from considering this decrease in the purchase price in determining transaction value. Since the late delivery agreement in the instant case was arrived at prior to importation, we do not find HRL 543537 to be dispositive of the issue presented here.

In HRL 543213, Customs addressed the valuation of merchandise subject to a Sales Confirmation between the buyer and seller which provided that if shipment was by air freight "...the difference between air freight and ordinary parcel post is payable in excess of the L/C amount." A review of the record revealed that the CIF price agreed to by the buyer and seller did not include air freight charges but included ordinary parcel post charges only. The parties agreed that if, as was the case, the articles were sent by air freight, the difference between the air freight and ordinary parcel post would be added to the original CIF price. Customs concluded that the "price actually paid or payable" for the articles did not include the difference between the air freight and the parcel post charges and that no deduction should be made for the difference between those charges.

The evidence in this case does not support finding that price reductions were made to the price actually paid or payable. Section 402(b)(4)(A) of the TAA provides that the price actually paid or payable for imported merchandise does not include charges incident to the international shipment of the merchandise. The National Import Specialist correctly points out that an importer is entitled to make a deduction for international freight to the extent it was included in the price. Similarly, to the extent that the importer could demonstrate that the late delivery agreement adjusted the price, an adjustment to the appraised value would be appropriate. In the instant case, the file, contracts and late delivery agreement do not indicate that the change in delivery terms was ever reflected as a change in the price actually paid or payable.

In allowing for a deduction from the total payment for actual expenses incurred for transportation, insurance and other services incident to the international shipment of the merchandise, section 402(b)(4)(A) of the TAA attempts to arrive at essentially an FOB or ex-factory price for the goods subject to appraisement. Here, the parties had a price actually paid or payable pursuant to an initial contract. Subsequently, they entered into a late delivery agreement, which although it was entered into prior to exportation, the late delivery agreement does not support finding that the price actually paid or payable for the merchandise was ever changed. The importer stated that the freight charges were not part of the total payment and quite often the $.40 allowance was not even claimed by the seller. It would, therefore, be inappropriate to make an adjustment for freight charges since these charges do not appear to have been reflected in the price for the merchandise.

HOLDING:

In light of the foregoing, we are unable to make an adjustment to the transaction value for freight charges since these charges do not appear to have been included in the price actually paid or payable for the imported merchandise.

You are hereby directed to deny the protest in full. A copy of this decision should be attached to the Customs Form 19 and mailed to the protestant as part of the notice of action on the protest.

Sincerely,

John Durant, Director

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